## _cr06117 - References

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---

### I. RECENT ECONOMIC DEVELOPMENTS — A. Introduction
- High standard of living in regional comparison (Figure 1).
- Economy characteristics:
  - Lacks natural resources, very open and undiversified.
  - Relies mainly on exports of services: tourism, international financial services, shipping, and oil refining.
  - Geographical position and constitutional link with the Netherlands supported well-being.
- Historical shocks and structural changes:
  - Repeal of the tax treaty with the United States in 1985 contributed to structural decline in the international financial sector.
  - Royal Dutch Shell closed its operations on Curaçao in 1985 and sold the refinery to the island government; subsequent lease to PDVSA.
  - Public finances did not fully adjust to the structural decline in revenues after 1985.
  - Two fiscal consolidation attempts in the 1990s with Fund assistance went off track due to lack of political commitment and financing constraints.
- Scope:
  - This paper reviews developments and policies over 2000–05.

### I. RECENT ECONOMIC DEVELOPMENTS — B. Production, Prices, and Labor Market Development
- Growth and composition (2000–05):
  - GDP growth supported particularly by buoyant tourism activity; increased added value in hotel and restaurant and retail trade sectors (Statistical Appendix Table 1).
  - Economic recovery was slow and relatively volatile.
- Inflation and external influences:
  - Underlying inflation remained low despite oil price hikes (Figure 2).
  - Fixed exchange rate against the U.S. dollar helped anchor inflation expectations.
  - Government absorbed a large part of the oil price increase; end-2005 Curaçao established an energy fund financed by the island government and CUROIL.
  - Gradual phasing-out of economic levies in compliance with the WTO helped keep consumer price inflation low.
- Labor market and migration:
  - Unemployment fluctuated around 15 percent; preliminary data indicate it increased to 16.3 percent in 2005 (Statistical Appendix Table 2).
  - Job creation rose with the economic recovery but not enough to absorb population growth driven by net migration inflow.
  - Average wage per worker decreased in real terms; employers cite labor market rigidities hindering job creation.
  - Productivity measured by production per worker fluctuated without a clear trend.
- Medium-term prospects:
  - Favorable prospects due to infrastructure investments (upgrading airports on Curaçao and St. Maarten) and large-scale tourism projects.
  - Arrival of American chain hotels and new U.S. flight connections expected to increase U.S. visitors to Curaçao.
  - A new tax treaty with the Netherlands is expected to contain the decline in the international financial sector.

### I. RECENT ECONOMIC DEVELOPMENTS — C. Public Finance
- Expenditure developments:
  - Expenditures on goods and services increased, partly driven by health care costs (Statistical Appendix Tables 3–5).
  - Substantial interest payments rose due to formalization of arrears and back payments of interest on Dutch development loans.
  - Personnel spending increased as pension premium payments to the civil servant pension fund were regularized, the wage freeze ended, and additional staff was hired.
- Revenue developments:
  - Government revenues in percent of GDP have remained practically unchanged.
  - Taxes on goods and services recovered strongly after a tax administration reorganization led to a decline in 2001.
  - Direct tax revenues as percent of GDP have been growing; exceptional increases in 2001 and 2002 due to clearing backlogs and Dutch technical assistance.
  - Taxes on international transactions declined as a percent of GDP due to phasing-out of economic levies.
  - Two large transfers of dividend tax from the international financial sector by the Dutch government contributed substantially to revenue growth, particularly in 2005; large swings reflect liquidation and asset transfers by international financial companies.
- Tax policy change:
  - Beginning of 2005, authorities reduced the marginal tax rate by 6.4 percent, the first phase of a 12.4 percent income tax reduction; next phase to be implemented in 2006.
  - Authorities estimate the 2005 tax reduction impact to be about 1 percent of GDP.
- Financing and public debt:
  - Financing of large deficits was facilitated by excessive domestic liquidity.
  - Outstanding public debt increased to 85.7 percent of GDP in 2005, up from 64.2 percent in 2000 (Statistical Appendix Tables 3–7).
  - Approximately 15 percent of GDP of the debt accumulation is accounted for by arrears converted into long-term marketable bonds (arrears with pension fund APNA and public health insurance company SVB); deficit financing accounted for the remaining 7 percent of GDP.

### I. RECENT ECONOMIC DEVELOPMENTS — D. Balance of Payments
- Trade and current account:
  - Trade deficit widened with economic recovery (Statistical Appendix Table 8); merchandise imports grew strongly due to domestic and tourist demand and higher oil prices.
  - Imports by free-zone reexporting companies (partly for stock-building and partly to meet domestic demand) added to the merchandise import growth.
  - Increased services activity from tourism partially offset the merchandise deficit; tourism recovered after hurricanes and the September 11, 2001 terrorist attack.
  - Improved market share in U.S. tourism and stronger position in Europe (euro appreciation) boosted tourism.
  - Large Dutch transfers of dividend taxes and private transfers from households abroad helped contain the current account deficit.
- Financing and external debt:
  - Recent current account deficits were largely financed by foreign borrowing rather than reserve depletion.
  - BNA estimates outstanding stock of total foreign debt increased to 36.3 percent of GDP in 2005 (Statistical Appendix Table 9); growth largely due to net trade credit to finance merchandise imports.
  - Airport construction (St. Maarten and Curaçao) and utilities investments were largely financed by foreign loans.
  - Direct investment rose due to takeover of Girobank by a foreign bank, capital injection by a direct investor, and nonresident real estate purchases.
- Reserves:
  - Official net international reserves rose from 1.9 to 2.9 months of import coverage between 2000 and 2005.
  - Reserve buildup driven by large development aid (Statistical Appendix Table 10), private capital inflows, and foreign borrowing.
  - Repatriation of maturing investments abroad by residents occurred in 2002–03; portfolio investment abroad increased again in 2004.

### I. RECENT ECONOMIC DEVELOPMENTS — E. Money, Banking, and Nonbank Financial Sector
- Monetary aggregates and credit:
  - Money and credit growth outpaced nominal GDP during 2000–05 (Statistical Appendix Table 11).
  - Strong money supply growth stemmed from net accumulation of foreign assets and net domestic credit; credit expansion contributed 66.1 percent to money growth.
  - Considerable part of credit growth due to increased demand for mortgage loans by private sector and general government borrowing.
  - Net foreign assets rose due to repatriation of maturing foreign investment by local institutional investors, large dividend tax transfers from the Dutch government, and Dutch development aid transfers to USONA.
- Deposits and investor behavior:
  - Strong demand for time deposits contributed to monetary aggregate growth.
  - Large local institutional investors (pension funds and insurance companies) were the main investors in time deposits.
  - Temporary portfolio shift from foreign securities to local securities by domestic investors due to unfavorable international financial market conditions; lack of competitive domestic investment alternatives led investors to time deposits.
- Banking sector performance and soundness:
  - Domestic banking sector performance improved during 2000–04 despite weak growth: profitability improved and total assets strengthened.
  - All but one bank met the central bank’s solvency requirement of 10.5 percent (total capital over total adjusted assets) (Statistical Appendix Table 12).
  - Commercial banks increased outstanding loans, investments, and interest-bearing cash holdings (in particular certificates of deposit).
  - Sector capitalization increased by end-2004, partly due to Girobank recapitalization.
  - Asset quality improved: nonperforming loans ratio declined to 3.6 percent at end-2004; provision for loan losses strengthened to 97 percent.
  - Banking sector concentration increased, with three banks holding 75 percent of total assets.
- International banking sector:
  - International banking sector remained sound; total assets increased in 2004 after a drop in 2003 despite loss in market share to less-regulated or better-located competitors (Statistical Appendix Table 13).
  - Profits in the international sector remained under pressure due to increased provisions and extraordinary losses.
  - New agreement with the Netherlands regarding taxation of dividends earned by Dutch citizens on investments in companies operating in the international financial sector in the Netherlands Antilles is expected to provide stability and contain recent decline.

### Nonbank financial institutions: investment behavior and sector performance
- Investment behavior:
  - Nonbank financial institutions repatriated large part of their maturing investment abroad due to the burst of the equity bubble in the United States and the low interest rates in the United States and Europe.
- Sector performance and pressures:
  - BNA reports performance in the sector as a whole was positive but performance across institutions was mixed.
  - Performance was to some extent affected by lower contribution receipts due to migration and/or early retirement.
  - Higher life expectancy has led to longer-term benefit payments, resulting in increased expenses for the industry.
  - Insurance sector servicing the local market experienced positive results in 2003 (Statistical Appendix Table 14).
  - Solvency requirements have been met on an aggregate basis for the life and nonlife insurance companies operating locally as well as internationally.

### Statistical comparisons of two groups of Caribbean economies (Group 1 vs Group 2)
- Group definitions:
  - Group 1: Antigua and Barbuda; The Bahamas; Barbados; Belize; Dominica; Dominican Republic; Grenada; Guyana; Haiti; Jamaica; St. Kitts and Nevis; St. Lucia; St. Vincent and the Grenadines; Suriname; Trinidad and Tobago.
  - Group 2: Anguilla; Aruba; British Virgin Islands; Cayman Islands; Guadaloupe; Martinique; Montserrat; Puerto Rico; St. Pierre and Miquelon; the Turks and Caicos Islands; U.S. Virgin Islands; the Netherlands Antilles.
- Key statistical findings:
  - "Average GDP per capita and life expectancy are significantly larger in Group 2 than in Group 1 at the 95 percent confidence level."
  - "Inflation is significantly lower in Group 2 than in Group 1 at the 90 percent confidence level."
- Regression analysis (Table 2):
  - Dependent variable: dummy (0 = Group 1, 1 = Group 2).
  - GDP per capita and life expectancy have statistically significant coefficients.
  - Inflation shows some statistical significance.
  - The White tests do not reject the null hypothesis of homoskedasticity.
  - Resulting inference: GDP per capita and life expectancy are relatively higher, and inflation relatively lower, for Group 2 economies than for Group 1 economies.
- Data limitations:
  - "Data limitations are severe, especially for territories."
  - Conclusions are tentative and should be interpreted as such.
  - Time references for data in Table 1:
    - Group 1 data are for 2003 and for Group 2 range between 2002 and 2004 (GDP per capita).
    - Other indicators use varying year ranges as footnoted in the source.

### Migration, labor flows, and growth dynamics
- Migration effects and labor mobility:
  - Free labor mobility between the Antilles and the Netherlands has been identified as setting a floor to real wages and making adjustment to shocks more costly in terms of output and employment.
  - Correlation observed between net migration flows and real GDP growth (Figure 2).
  - Mishra (2005) finding: Group 1 countries lost "10–40 percent" of their labor force—especially the high-skilled part—due to migration to OECD countries between 1965 and 2000.
  - Despite being the world’s largest recipient of remittances as a share of GDP, Mishra’s welfare calculations suggested that migration losses tend to outweigh remittances.
- Output cycle characteristics:
  - Cashin (2004) found Caribbean cycles (subset of Group 1) are more symmetric than those of major industrial countries.
  - Output asymmetries may have been smoothed through labor force migration flows; migration can dampen output growth and income fluctuations because job destruction is more cyclically responsive than job creation.

### Fiscal and financing implications; policy recommendations
- Financing and fiscal discipline:
  - Closer links to metropoles may have lowered financing costs for firms and propped up investment and trend growth.
  - Conversely, closer links may have made financing of fiscal deficits relatively less costly, potentially reducing fiscal discipline.
  - Evidence by 2003: "14 out of 15 Caribbean countries included in Group 1 had an average fiscal deficit of nearly 6 percent of GDP, and they ranked in the top 30 of the world’s highly indebted emerging market countries (Sahay, 2005)."
- Policy implications and recommendations:
  - The new countries to be born from the dissolution of the federation should assign priority to a fiscal framework that internalizes fiscal discipline and accountability.
  - The new countries would benefit from maximizing the links that their population may maintain with the Netherlands and other countries of migration destination, even if temporary, because such links manifest through remittances (mostly official in the Antillean case).
  - There is empirical evidence that remittances can lead to more human and physical investment and thus higher trend growth.

### 29. What can the new countries do to limit the attraction represented by relatively higher foreign wages?
- Growth-enabling domestic incentives and structural reforms:
  - Best strategy: apply policies that set growth-enabling domestic incentives.
  - Growth-enhancing structural reforms should:
    - increase the flexibility of labor;
    - reduce the cost of doing business;
    - enhance competition in domestic goods and services markets;
    - achieve greater regional and multilateral cooperation via freer international trade.
- Human capital and infrastructure:
  - Better education, training, and well-targeted infrastructure investment are essential to improve the new countries’ attractiveness for foreign investment.
  - Education should be better tailored to the needs of these economies, which are largely dependent on services (e.g., tourism and financial services).
- Financial sector supervision:
  - Given the importance of the financial sector for at least one of the new countries and the well-documented link between weak financial sector supervision and crises, further strengthening of financial supervision should be an important policy objective.
- Reducing vulnerabilities and managing external shocks:
  - Although little can be done to reduce the economies’ exposure to foreign shocks, the domestic policies above should:
    - contribute to reduce shocks’ welfare costs by allowing faster relative price changes;
    - set the ground for world-market driven diversification.

*Italic: Content based solely on the provided PDF content unit _cr06117 - References.*

### References..............................................................................................................

### _cr06117 - References

### I. RECENT ECONOMIC DEVELOPMENTS — A. Introduction
- The Netherlands Antilles has a high standard of living in regional comparison (Figure 1).
- Economy characteristics:
  - Lacks natural resources, very open and undiversified.
  - Relies mainly on exports of services: tourism, international financial services, shipping, and oil refining.
  - Geographical position and constitutional link with the Netherlands supported well-being.
- Historical shocks and structural changes:
  - Repeal of the tax treaty with the United States in 1985 contributed to structural decline in the international financial sector.
  - Royal Dutch Shell closed its operations on Curaçao in 1985 and sold the refinery to the island government; subsequent lease to PDVSA.
  - Public finances did not fully adjust to the structural decline in revenues after 1985.
  - Two fiscal consolidation attempts in the 1990s with Fund assistance went off track due to lack of political commitment and financing constraints.
- This paper reviews developments and policies over 2000–05.

### I. RECENT ECONOMIC DEVELOPMENTS — B. Production, Prices, and Labor Market Development
- Growth and composition:
  - Between 2000–05, GDP growth supported particularly by buoyant tourism activity; increased added value in hotel and restaurant and retail trade sectors (Statistical Appendix Table 1).
  - Economic recovery was slow and relatively volatile.
- Inflation and external influences:
  - Underlying inflation remained low despite oil price hikes (Figure 2).
  - Fixed exchange rate against the U.S. dollar helped anchor inflation expectations.
  - Government absorbed a large part of the oil price increase; end-2005 Curaçao established an energy fund financed by the island government and CUROIL.
  - Gradual phasing-out of economic levies in compliance with the WTO helped keep consumer price inflation low.
- Labor market and migration:
  - Unemployment fluctuated around 15 percent; preliminary data indicate it increased to 16.3 percent in 2005 (Statistical Appendix Table 2).
  - Job creation rose with the economic recovery but not enough to absorb population growth driven by net migration inflow.
  - Average wage per worker decreased in real terms; employers cite labor market rigidities hindering job creation.
  - Productivity measured by production per worker fluctuated without a clear trend.
- Medium-term prospects:
  - Favorable prospects due to infrastructure investments (upgrading airports on Curaçao and St. Maarten) and large-scale tourism projects.
  - Arrival of American chain hotels and new U.S. flight connections expected to increase U.S. visitors to Curaçao.
  - A new tax treaty with the Netherlands is expected to contain the decline in the international financial sector.

### I. RECENT ECONOMIC DEVELOPMENTS — C. Public Finance
- Expenditure developments:
  - Expenditures on goods and services increased, partly driven by health care costs (Statistical Appendix Tables 3–5).
  - Substantial interest payments rose due to formalization of arrears and back payments of interest on Dutch development loans.
  - Personnel spending increased as pension premium payments to the civil servant pension fund were regularized, the wage freeze ended, and additional staff was hired.
- Revenue developments:
  - Government revenues in percent of GDP have remained practically unchanged.
  - Taxes on goods and services recovered strongly after a tax administration reorganization led to a decline in 2001.
  - Direct tax revenues as percent of GDP have been growing; exceptional increases in 2001 and 2002 due to clearing backlogs and Dutch technical assistance.
  - Taxes on international transactions declined as a percent of GDP due to phasing-out of economic levies.
  - Two large transfers of dividend tax from the international financial sector by the Dutch government contributed substantially to revenue growth, particularly in 2005; large swings reflect liquidation and asset transfers by international financial companies.
- Tax policy change:
  - Beginning of 2005, authorities reduced the marginal tax rate by 6.4 percent, the first phase of a 12.4 percent income tax reduction; next phase to be implemented in 2006.
  - Authorities estimate the 2005 tax reduction impact to be about 1 percent of GDP.
- Financing and public debt:
  - Financing of large deficits was facilitated by excessive domestic liquidity.
  - Outstanding public debt increased to 85.7 percent of GDP in 2005, up from 64.2 percent in 2000 (Statistical Appendix Tables 3–7).
  - Approximately 15 percent of GDP of the debt accumulation is accounted for by arrears converted into long-term marketable bonds (arrears with pension fund APNA and public health insurance company SVB); deficit financing accounted for the remaining 7 percent of GDP.

### I. RECENT ECONOMIC DEVELOPMENTS — D. Balance of Payments
- Trade and current account:
  - Trade deficit widened with economic recovery (Statistical Appendix Table 8); merchandise imports grew strongly due to domestic and tourist demand and higher oil prices.
  - Imports by free-zone reexporting companies (partly for stock-building and partly to meet domestic demand) added to the merchandise import growth.
  - Increased services activity from tourism partially offset the merchandise deficit; tourism recovered after hurricanes and the September 11, 2001 terrorist attack.
  - Improved market share in U.S. tourism and stronger position in Europe (euro appreciation) boosted tourism.
  - Large Dutch transfers of dividend taxes and private transfers from households abroad helped contain the current account deficit.
- Financing and external debt:
  - Recent current account deficits were largely financed by foreign borrowing rather than reserve depletion.
  - BNA estimates outstanding stock of total foreign debt increased to 36.3 percent of GDP in 2005 (Statistical Appendix Table 9); growth largely due to net trade credit to finance merchandise imports.
  - Airport construction (St. Maarten and Curaçao) and utilities investments were largely financed by foreign loans.
  - Direct investment rose due to takeover of Girobank by a foreign bank, capital injection by a direct investor, and nonresident real estate purchases.
- Reserves:
  - Official net international reserves rose from 1.9 to 2.9 months of import coverage between 2000 and 2005.
  - Reserve buildup driven by large development aid (Statistical Appendix Table 10), private capital inflows, and foreign borrowing.
  - Repatriation of maturing investments abroad by residents occurred in 2002–03; portfolio investment abroad increased again in 2004.

### I. RECENT ECONOMIC DEVELOPMENTS — E. Money, Banking, and Nonbank Financial Sector
- Monetary aggregates and credit:
  - Money and credit growth outpaced nominal GDP during 2000–05 (Statistical Appendix Table 11).
  - Strong money supply growth stemmed from net accumulation of foreign assets and net domestic credit; credit expansion contributed 66.1 percent to money growth.
  - Considerable part of credit growth due to increased demand for mortgage loans by private sector and general government borrowing.
  - Net foreign assets rose due to repatriation of maturing foreign investment by local institutional investors, large dividend tax transfers from the Dutch government, and Dutch development aid transfers to USONA.
- Deposits and investor behavior:
  - Strong demand for time deposits contributed to monetary aggregate growth.
  - Large local institutional investors (pension funds and insurance companies) were the main investors in time deposits.
  - Temporary portfolio shift from foreign securities to local securities by domestic investors due to unfavorable international financial market conditions; lack of competitive domestic investment alternatives led investors to time deposits.
- Banking sector performance and soundness:
  - Domestic banking sector performance improved during 2000–04 despite weak growth: profitability improved and total assets strengthened.
  - All but one bank met the central bank’s solvency requirement of 10.5 percent (total capital over total adjusted assets) (Statistical Appendix Table 12).
  - Commercial banks increased outstanding loans, investments, and interest-bearing cash holdings (in particular certificates of deposit).
  - Sector capitalization increased by end-2004, partly due to Girobank recapitalization.
  - Asset quality improved: nonperforming loans ratio declined to 3.6 percent at end-2004; provision for loan losses strengthened to 97 percent.
  - Banking sector concentration increased, with three banks holding 75 percent of total assets.
- International banking sector:
  - International banking sector remained sound; total assets increased in 2004 after a drop in 2003 despite loss in market share to less-regulated or better-located competitors (Statistical Appendix Table 13).
  - Profits in the international sector remained under pressure due to increased provisions and extraordinary losses.
  - New agreement with the Netherlands regarding taxation of dividends earned by Dutch citizens on investments in companies operating in the international financial sector in the Netherlands Antilles is expected to provide stability and contain recent decline.

_Italic: Content based solely on the provided PDF content unit _cr06117 - References._

### 20.      Developments on the international financial markets affected the investment

### 20.      Developments on the international financial markets affected the investment strategies of the nonbank financial institutions.

### Nonbank financial institutions: investment behavior and sector performance
- Nonbank financial institutions repatriated large part of their maturing investment abroad due to the burst of the equity bubble in the United States and the low interest rates in the United States and Europe.
- BNA reports:
  - Performance in the sector as a whole was positive but performance across institutions was mixed.
  - Performance was to some extent affected by lower contribution receipts due to migration and/or early retirement.
  - Higher life expectancy has led to longer-term benefit payments, resulting in increased expenses for the industry.
- Insurance sector servicing the local market experienced positive results in 2003 (Statistical Appendix Table 14).
- Solvency requirements have been met on an aggregate basis for the life and nonlife insurance companies operating locally as well as internationally.

### Statistical comparisons of two groups of Caribbean economies (Group 1 vs Group 2)
- Group definitions:
  - Group 1: Antigua and Barbuda; The Bahamas; Barbados; Belize; Dominica; Dominican Republic; Grenada; Guyana; Haiti; Jamaica; St. Kitts and Nevis; St. Lucia; St. Vincent and the Grenadines; Suriname; Trinidad and Tobago.
  - Group 2: Anguilla; Aruba; British Virgin Islands; Cayman Islands; Guadaloupe; Martinique; Montserrat; Puerto Rico; St. Pierre and Miquelon; the Turks and Caicos Islands; U.S. Virgin Islands; the Netherlands Antilles.
- Key statistical findings:
  - "Average GDP per capita and life expectancy are significantly larger in Group 2 than in Group 1 at the 95 percent confidence level."
  - "Inflation is significantly lower in Group 2 than in Group 1 at the 90 percent confidence level."
- Regression analysis (Table 2):
  - Dependent variable: dummy (0 = Group 1, 1 = Group 2).
  - GDP per capita and life expectancy have statistically significant coefficients.
  - Inflation shows some statistical significance.
  - The White tests do not reject the null hypothesis of homoskedasticity.
  - Resulting inference: GDP per capita and life expectancy are relatively higher, and inflation relatively lower, for Group 2 economies than for Group 1 economies.

### Data limitations and interpretation
- "Data limitations are severe, especially for territories."
- Conclusions are tentative and should be interpreted as such.
- Time references for data in Table 1 (as presented):
  - Group 1 data are for 2003 and for Group 2 range between 2002 and 2004 (GDP per capita).
  - Other indicators use varying year ranges as footnoted in the source.

### Migration, labor flows, and growth dynamics
- Migration effects and labor mobility:
  - Free labor mobility between the Antilles and the Netherlands has been identified as setting a floor to real wages and making adjustment to shocks more costly in terms of output and employment.
  - Correlation observed between net migration flows and real GDP growth (Figure 2).
  - Mishra (2005) finding: Group 1 countries lost "10–40 percent" of their labor force—especially the high-skilled part—due to migration to OECD countries between 1965 and 2000.
  - Despite being the world’s largest recipient of remittances as a share of GDP, Mishra’s welfare calculations suggested that migration losses tend to outweigh remittances.
- Output cycle characteristics:
  - Cashin (2004) found Caribbean cycles (subset of Group 1) are more symmetric than those of major industrial countries.
  - Output asymmetries may have been smoothed through labor force migration flows; migration can dampen output growth and income fluctuations because job destruction is more cyclically responsive than job creation.

### Fiscal and financing implications; policy recommendations
- Financing and fiscal discipline:
  - Closer links to metropoles may have lowered financing costs for firms and propped up investment and trend growth.
  - Conversely, closer links may have made financing of fiscal deficits relatively less costly, potentially reducing fiscal discipline.
  - Evidence by 2003: "14 out of 15 Caribbean countries included in Group 1 had an average fiscal deficit of nearly 6 percent of GDP, and they ranked in the top 30 of the world’s highly indebted emerging market countries (Sahay, 2005)."
- Policy implications and recommendations:
  - The new countries to be born from the dissolution of the federation should assign priority to a fiscal framework that internalizes fiscal discipline and accountability.
  - The new countries would benefit from maximizing the links that their population may maintain with the Netherlands and other countries of migration destination, even if temporary, because such links manifest through remittances (mostly official in the Antillean case).
  - There is empirical evidence that remittances can lead to more human and physical investment and thus higher trend growth.

*Source: IMF staff analysis as presented in the content unit.*

### 29.      What can the new countries do to limit the attraction represented by relatively higher

### 29.      What can the new countries do to limit the attraction represented by relatively higher foreign wages?

### Growth-enabling domestic incentives and structural reforms
- Best strategy: apply policies that set growth-enabling domestic incentives.
- Growth-enhancing structural reforms should:
  - increase the flexibility of labor;
  - reduce the cost of doing business;
  - enhance competition in domestic goods and services markets;
  - achieve greater regional and multilateral cooperation via freer international trade.

### Human capital and infrastructure
- Better education, training, and well-targeted infrastructure investment are essential to improve the new countries’ attractiveness for foreign investment.
- Education should be better tailored to the needs of these economies, which are largely dependent on services (e.g., tourism and financial services).

### Financial sector supervision
- Given the importance of the financial sector for at least one of the new countries and the well-documented link between weak financial sector supervision and crises, further strengthening of financial supervision should be an important policy objective.

### Reducing vulnerabilities and managing external shocks
- Although little can be done to reduce the economies’ exposure to foreign shocks, the domestic policies above should:
  - contribute to reduce shocks’ welfare costs by allowing faster relative price changes;
  - set the ground for world-market driven diversification.

*Source: _cr06117 - 29.      What can the new countries do to limit the attraction represented by relatively higher*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06117.pdf_