Emsley D Tromp: Developmental challenges in a small economy - the
case of St Maarten
Address by Dr Emsley D Tromp, President of the Bank of the Netherlands Antilles (Bank van
de Nederlandse Antillen), on the occasion of The State of the Economy Presentation,
Philipsburg, St Maarten, 20 March 2008.
* * *
Ladies and gentlemen, good evening,
With pleasure I accepted the invitation from Commissioner Buncamper-Molanusn to speak to
you on the relevant theme "Developmental Challenges in a Small Economy" at this event
surrounding the presentation of the Economic Outlook 2008. St. Maarten is a very small
economy, but a highly successful one as I shall demonstrate later. I shall begin my address
this evening with an analysis of St. Maarten's economy, which is growing at an impressive
speed. In the second part of my address, I shall discuss with you some of the challenges of
the constitutional changes that are ahead for the island. If managed well, these changes
create enormous opportunities for high sustainable growth in the coming years.
St. Maarten is the second largest economy of the Netherlands Antilles with a 20% share of
total Gross Domestic Product, approximately 1.2 billion guilders. Although Curacao's 70%
share is considerably bigger, St. Maarten's economy has performed much better. Since the
end of the economic recession in 2001, the economy of St. Maarten has grown by an annual
average rate of 3.8% in real terms, compared to 1.8% for Bonaire, and a marginal 0.3% for
Curacao. A preliminary estimate by the Central Bureau of Statistics indicates a real growth
rate of 4.5% for St. Maarten for 2007. The island's strong economic growth has been
accompanied by a moderate rate of inflation, averaging 1.8%, but increasing to 2.3% in
2007. The higher- than- average inflation rate can be explained mainly by the impact of rising
world oil prices.
St. Maarten's robust economic growth contributed to a decline in the unemployment rate,
which reached 10.6% in 2007. This rate is better than the 12.0% in Curacao, but Bonaire's
unemployment rate was even lower at 7.8%. Youth unemployment still contrasted sharply
with overall unemployment. With 26.0% of St. Maarten's labor force in the age group of
1524 unemployed, the island has the highest rate in the Netherlands Antilles; this figure
compares to 24.2% in Curacao and 20.5% in Bonaire.
Tourism is the dominant sector in St. Maarten's economy and can be illustrated in various
ways. In the National Accounts, tourism activities encompass the following sectors: Trade;
Hotels & Restaurants; Transport, Storage & Communication; and Real Estate, Renting &
Business Activities. Gross value added by these sectors comprises 56% of total business
activities and 42% of Gross Domestic Product for the island. St. Maarten welcomes an
impressive number of visitors each year. The number of stay-over visitors is approaching the
500,000 limit, and the number of cruise passengers has exceeded 1.4 million. In 2007, St.
Maarten accounted for 56% of stay-over tourism and 76% of cruise tourism in the
Netherlands Antilles. Tourism activities in St. Maarten generate approximately 1.2 billion
guilders in foreign exchange revenues annually, representing 64% of total foreign exchange
revenues from tourism in the Netherlands Antilles.
However, these impressive figures are somewhat overshadowed by the disappointing visitor
growth rates during the last two years. The number of stay-over visitors has remained about
the same since 2005, while the number of cruise passengers declined in 2006 and remained
almost unchanged in 2007. I think the main explanation for this development is that St.
Maarten's utilization of its tourism infrastructure has reached full capacity. Therefore, further
growth can be attained only by expanding the tourism infrastructure. Investors seem to
believe in the potential for further growth, as evidenced by the continued robust growth in
construction activities indicated in a press release from the Central Bureau of Statistics and
the Department of Economic Affairs of St. Maarten last month. Hotel room and time share
capacity as well as cruise pier capacity are expanding, creating prospects for the resumption
of growth in the number of visitors in the near future. Another explanation for the weak
growth in tourism may be the weakening economy of the United States, from which more
than half of St. Maarten's tourists originate.
In line with the weak tourism performance, the airport and the harbor of St. Maarten also
showed weak growth in 2007. Nevertheless, the Princess Juliana International Airport
remained the busiest of the Netherlands Antilles airports, with 1.7 million passengers
handled, half of all passengers handled in the Netherlands Antilles. With the recent
modernization and expansion of St. Maarten's airport, its capacity has increased to 2.5
million passengers per year. Thus, this part of St. Maarten's infrastructure is capable of
absorbing the anticipated recovery in tourism growth without any problems.
Harbor growth is expected to resume once the expansion of the cruise pier and the container
and freight handling facilities have been completed. I support the vision behind the expansion
of the container and freight handling facilities to develop the harbor as a transit point for the
distribution of goods to the neighboring islands. This is a step towards the necessary
diversification of the economy.
Ladies and gentlemen, I am an optimist who worries a lot. Therefore, allow me now to draw
your attention to some of the weaknesses of St. Maarten's economy. The most obvious
weakness is the heavy reliance on one principal economic activity, namely, tourism. This
characteristic is typical of most small island economies. However, such heavy reliance on a
single activity enhances the business cycle and makes the economy more susceptible to
external shocks.
Reducing reliance on one main economic activity requires diversification. A small island
economy like St. Maarten has, of course, only limited possibilities for diversifying its economy
given, among other things, its lack of natural resources, scarcity of land, and small domestic
market. This situation should not, however, prevent its policymakers and the business sector
from coming up with creative ideas. Enhancing the regional distribution function of St.
Maarten is a viable policy to pursue. The current expansion of the harbor and the recent
expansion of the airport fully support this policy. I also note the idea of developing an
international financial and business services sector on the island, an activity worth further
exploration. However, a word of caution is at order: the daunting list of challenges that
surround the creation of a world class international financial and business services sector
requires a world class regulatory infrastructure and the institutional capacity to implement it,
which may prove to be overly ambitious given your resource constraints.
Another major weakness in St. Maarten's economy is that the public infrastructure has not
kept up with the expansion of the economy, either physically or socially. The physical
dimension can be illustrated by the insufficient capacity of the road infrastructure, which has
resulted in structural congestion most of the day. Electricity and water production cannot
keep up with demand, causing frequent power outages and water shortages. The increasing
amount of solid and liquid waste generated by businesses and the public cannot be
processed effectively, which has created a growing burden for the environment. Some
examples of the social dimension are shortages of schools, daycare facilities, and social
housing, an understaffed police force, and an inadequate penitentiary system. These
shortcomings have resulted in a rising crime rate and increasing social imbalances,
aggravated by the illegal immigration issue.
Ladies and gentlemen, I mention these weaknesses since they are a good starting point for
discussing with you the challenges of the constitutional changes for the future country of St.
Maarten. One of the many tasks in preparing the island for its new constitutional status is
addressing effectively the observed economic and social imbalances to create a sound
social-economic basis for durable balanced growth in the years ahead. With the new status
comes the responsibility to govern the new country with a population anxious to reap the
benefits of the new status. It is not a question of survival, but a challenge of leadership. Like
inheritance, success can be invested productively or not. The question therefore to be
answered is whether you are investing in what it takes to continue to build on the existing
foundation while using the new status to meet the challenges that will await you as a new
country within the Kingdom.
According to the current thinking, St. Maarten is scheduled to become a country on
December 15 of this year. However, almost all stakeholders realize that this date is not
attainable. I strongly believe that a thorough preparation with all the laws and institutions in
place is crucial for a viable start as a country. Until this process is completed, assumption of
the new constitutional status is bound to create more issues than it solves for Sint Maarten.
The number of issues that must be addressed before St. Maarten can become a country are
quite overwhelming, but they also create unique opportunities to correct the administrative,
economic, and social ills on the island with broad technical and financial support from the
Dutch government. Given the time constraint, I have selected a few to discuss with you in
more detail. These are the design of an effective and efficient government apparatus, sound
government finances, and the future of the monetary system and financial supervision.
Let me start with the design of the government apparatus. The present dual layer of
government has created numerous inefficiencies, promoted tensions between the central
and island administrations, and frequently undermined the effective implementation of
policies. Now that St. Maarten is becoming a country and the central government is being
dismantled, a unique opportunity is created for the design of a new effective and efficient
government apparatus. First, the government tasks must be defined, including the tasks that
are taken over from the central government. Second, legislation on which to base the
implementation of the government tasks must be prepared and approved. I think current
legislation will generally be adequate, complemented with the necessary amendments. Third,
the government apparatus must be adequately staffed in accordance with the requirements
in the job description of each position. The positions can be filled from the current pool of civil
servants of the island as well as from the central government, if necessary complemented
with additional training. Positions that remain open should be advertised and filled with
external candidates. Current civil servants who do not meet the job requirements and cannot
be properly retrained should seek employment in the private sector after receiving adequate
redundancy payments. Finally, the principles of good governance should be embedded in the
new government apparatus to guarantee effective and responsible spending of the citizens'
tax money, efficient high quality services to the public, and effective sanctions for misconduct
and abuse.
The second issue that must be addressed and about which I would like to share my views
with you is sound public finances. Based on the relatively few occasions that St. Maarten has
approached the central government for financial assistance, it appears that it has been able
to bring expenditures in line with revenues. However, its budgetary process has been rather
murky. The government has operated quite a few times without an approved budget for part
of the year. Regular progress reports on the implementation of the budget have been absent.
Budget audits have been delayed for years. Although the government is legally not allowed
to borrow, St. Maarten has built up a considerable debt, sometimes created because of
creative financing constructions. I do not want to suggest that St. Maarten has a monopoly
on weak fiscal discipline and deviation from the budget legislation. The other islands and
even the central government also have failed in this area. I only mention it as an illustration
that a drastic change is necessary in how we approach the public finances in preparing for
the island's future status as a country.
In the agreement between the central government, the governments of Curacao and St.
Maarten, and the Dutch government of November 2, 2006, better known as the
"Slotverklaring", the parties explicitly underscored the importance of starting the new
constitutional status with a financially sound position. To arrive at this position, the Dutch
government is prepared to take over a substantial part of the debt of the entities. In the new
situation, St. Maarten will be granted the long desired authority to borrow but within strict
limits. The maximum allowed outstanding debt will be bound to an interest burden rule,
prescribing that the interest expenses in the budget may not exceed 5% of the average
revenues of the preceding three years. It is still not very clear what this means for St.
Maarten. First, the interest burden must be calculated from an estimated revenue base of the
country of St. Maarten. Second, the room for borrowing depends also on the loans that
remain the responsibility of St. Maarten after the debt relief. But I think it is safe to conclude
that there will be some opportunity to borrow.
The debt relief and authority to borrow are bound by strict conditions and control that will
substantially enhance fiscal discipline and transparency. First, the current account of the
budget may not have a deficit and must be presented in a multi-annual framework. Second,
interest expenses may not exceed the 5% rule. Third, the recommendations of the Financial
Position working group on improvement of the financial management and control must be
implemented as planned. Fourth, the entire budgetary process from preparation of the draft
budget to the accountability of its implementation is subject to supervision by an autonomous
supervisory authority that will monitor whether the budget rules and other agreements are
met, suggest corrective actions in case of deviations, and report its findings on a regular
basis.
I can imagine that this new approach to the public finances will be a culture shock for the
island. In the beginning, it will create frequent tensions with the supervisory authority; the
recent experiences of Bonaire, Saba, and St. Eustatius serve as an example here. It is for
this reason that I have always been a strong proponent of a complete debt relief with the
simultaneous elimination of the authority to borrow. But be as it may, we have to go through
conditio sine qua non
this period of adaptation to arrive at lasting sound public finances, a for
building up a viable country with a prosperous future for its citizens.
The third issue I'd like to bring forward, and one which I keep particularly close at heart as a
central banker, is the future of our monetary system and financial sector supervision in the
new constitutional arrangement. The "Slotverklaring" explicitly states that there will be one
central bank for Curacao and St. Maarten responsible for monetary, financial, and integrity
supervision based on one set of laws. Rationally considered, I fully subscribe to this
statement. It means that the current central bank will be broadly maintained, continuing its
good reputation and credibility in safeguarding the stability of the monetary and financial
system. I believe this is very important in light of the uncertainties surrounding the numerous
changes that will take place on the road toward the new constitutional status of the islands.
In addition, with a common central bank, economies of scale can be maintained with regard
to the high costs of highly educated staff and modern information and communication
infrastructure. Moreover, a common central bank will provide a larger common economic
area with broader economic diversification, which may dampen the impact of a shock
occurring on one of the islands.
If Curacao and St. Maarten as autonomous countries share a common central bank and
currency, they join a monetary union. Since autonomous countries have their own policy
responsibilities, a monetary union requires a high degree of policy coordination and harmony
to ensure a balanced and effective monetary policy. In addition, a well functioning monetary
union requires free movement of goods, services, capital, and labor between the countries.
These requirements may be difficult to reconcile with the desire for more autonomy by
Curacao and St. Maarten since this desire was the main driving force behind opting for
country status. Ladies and gentlemen, I do not like to sound like the rooster who claims credit
for the sunrise. We must begin however, with the understanding that strong political
commitment is required to give up some of the newly won policy autonomy in the interest of a
stable and effective monetary union. If we fail to comprehend this, we will not be able to
create a stable monetary environment conducive to growth and stability. We will need to
work well together because we have a great challenge before us. It is our own incredible
success that we face.
As mentioned, like inheritance the new found opportunities can be exploited successfully or
be squandered. Though not far from inconceivable, the inevitable question becomes; if the
politicians cannot come to an agreement on a common central bank, what will be the next
best alternative? Given the current financial architecture, Curacao will likely continue the
current central bank, although its revenue base will shrink as a result of the division of the
foreign exchange reserves with St. Maarten and the omission of income from the issuance of
banknotes and currency transactions with banks in St. Maarten.
With respect to St. Maarten, it is the question whether it will be able to sustain a full- fledged
central bank in a profitable way. The smallness of the economy simply hampers the
generation of enough income to cover the operational costs. This means that the central
bank will become dependent on government financing, which will undermine its
independence and, hence, credibility. In general, a central bank contributes to government
revenues, not the other way around.
Actually, St. Maarten does not need its own monetary policy. An own monetary policy and
consequently an own central bank is needed only if you have your own currency. Because
the US dollar is used so widely, official dollarization is an efficient and feasible alternative.
Hence, dollarization eliminates the need for a central bank. In effect, you will elect to
distribute the seignorage profit to the public at large rather than having it accrued to the
central bank.
The other question which we cannot deflect is:
What about the supervision of the financial sector? Since most financial institutions in St.
Maarten are subsidiaries or branches of foreign-based institutions, the central bank of the
respective parent company continues to include them in its supervision. Instead of setting up
its own supervisory authority, which will suffer from large diseconomies of scale, it would be
much more efficient and effective for St. Maarten to outsource the supervision of the financial
sector to the central bank of the parent institution.
Ladies and gentlemen, St. Maarten's economic development can be considered a success
story. However, it is accompanied by increasing imbalances in the public domain, which will
eventually undermine the sustainability of the current growth. The preparations for the new
constitutional status provide a unique opportunity to address these imbalances effectively,
helped by financial and technical support from the Dutch government. An efficient and
effective government apparatus, sound public finances, a stable monetary system, good
governance, and adequate financial sector supervision are essential elements for building a
viable and prosperous country. The road towards this goal is marred with obstacles and
setbacks.
You have to be careful not to devote too much energy to achieve the new status while
neglecting to strengthen the foundation and creating the institutional capacity to govern the
new country. Our history is too simple and the facts, as they are commonly understood, not
so clear. Governing a country is a matter of no little importance. It requires skills different
than those for governing an island territory. Dismissing this may prove to be more disruptive
than helpful. You will be leading a nation in a world riven with economic, financial and
environmental challenges. What happens anywhere can matter everywhere. But, the people
of St. Maarten have proven resilient when the going gets tough, and I am convinced that they
are tough enough to get going.
Thank you for your attention.