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Stabilizing the economic patient

Author: Rendell de Kort, Economist

This shock is unprecedented and unlike anything we have ever experienced before locally. But also not globally. The IMF released its latest World Economic Outlook on April 14 suggesting that the world economy would contract in 2020 by 3 percent, but recover in 2021 by 5.8 percent, only to backtrack 4 days later as it realizes the implications of the global crisis are much more profound. On April 18 it now warned the global recession will be sharper and prolonged with output contracting further in 2021.

This is telling, because the global institution with arguably the biggest capacity of economists in the world is struggling to fully grasp the extent to which the shock is transmitted as the crisis continues to rapidly unfold. This complexity on a global level obviously also translates to local uncertainty here in Aruba. With a much smaller capacity, small islands are looking to weather a shock that is difficult to comprehend because it’s so comprehensive.

If the Aruban economy was a patient, it is experiencing multiple organ failure and the doctors are looking at a dashboard where all the indicators are flashing red. Administering medicine that usually helps a patient overcome one aliment now might be ineffective given that it was never intended to be administered in a situation of multiple organ failure. That’s the best-case scenario, at worse it could unintentionally deteriorate the condition of other organs leaving the patient worse off. On top of that, the government who is the doctor, is scratching his head, looking at his medicine cabinet and realizing that most of what the hospital used to have in terms of medicine was wasted before this patient came in.

The patient

As is the case with the patient, the doctor needs to focus in on firstly what it wants to achieve, and by quickly diagnosing what the top priorities are to address, to then move towards deciding a plan of action.

Similarly, in economic sense the structure becomes increasingly important as various stakeholders: from public sector employees to business owners become increasingly vocal as with time they are increasingly subjected to adversity. For policy makers it becomes challenging to find coherence in many policy suggestions and recommendations that are floated.

Aruba needs to focus on what as a Nation our highest objectives are and from there define intermediate objectives.

We are in a phase where we first need to stabilize the economy during a crisis that is eroding our well-being as a society. What matters foremost right now is that individuals are concerned about their health, about not having jobs and about not having enough income to sustain themselves. The reality is that most families are very vulnerable living paycheck by paycheck and Arubans don’t have a culture of saving.

Apart from the economic cost and perhaps more importantly, there are huge social risks that include increased rates of family dissolution, higher suicide rates, increased crime, domestic violence, rising inequality and absolute poverty.

Here it is important to realize that the patient is feeling the pains of shocks that are fiscal, monetary and economic – but these are symptoms.

Of the many policy ideas being floated, the ones we should pursue in the first place are the ones that are designed to ensure that individuals are protected as best they can to meet their most basic needs. If we start at the bottom of the pyramid of human needs, the question we must ask ourselves when considering any policy proposal is: does this help our people achieve health, food or energy security?

The mechanisms at play that threaten our food and energy security are the following:

- Real disposable income of households is severely reduced due to high unemployment and falling income levels both in the private sector and in the public sector.

- Prices of imported goods could potentially increase due to lower global supply

- Supply chain disruptions and global shortages could lead to the unavailability of imported food products

- The imbalance between foreign exchange needed to maintain food imports and the absence of foreign exchange earnings could put pressure on the exchange rate and external price stability.

- The liquidity of the general health insurance and utility companies and is affected by low compliance levels of households.

For most of these factors the source of the shock is external and that cannot be influenced. What we can do is pivot Aruba’s productive capacity away from import dependence. This results in:

- Higher utilization of the available productive capacity which is largely idle now.

- Reducing the pressure on external price stability by substituting foreign exchange outflow through imports with local production.

- Mitigate the exposure of households to imported price shocks and supply constraints.

- Reigniting the use of productive capacity even during the lock-down.

These are the arguments that favor the stimulation of the local agricultural sector and food production at the household level and energy generation. But it also implies a massive shift in the use productive resources that can become permanent in time. This is consistent with the idea of a universal basic income, or to put it in Aruba’s context, to compensate employees directly rather than to maintain them artificially employed in sectors which have no resilience to the shock we are experiencing. It is only if the labor market is flexible to pivot to the expanding food and energy sectors that the little money households have to spend is maintained on Aruba, supporting Aruban employment rather than further depleting our reserves and further exposing us to import shocks.

To facilitate this shift, we should focus on the following:

- Obtaining funds with assistance from the Netherlands to secure households can sustain themselves in the short term.

- Ensuring the utility companies, general health insurance and social insurance bank maintain enough liquidity to serve their beneficiaries without interruptions.

- Capital controls by the Central Bank to prevent undesirable outflows of foreign reserves.

- Flexibilization of the labor market by allowing companies to reduce their wage bill and thereby protect their balance sheets.

- Removing price controls or red tape on domestic production to create space for local food production and alternative energy generation to flourish.

- Stimulation of food production on the household level as well as commercial food production (incentives could include preferential water tariffs, speeding up the process of issuance of agricultural land, guarantee fund for capital investments, government intervention to prevent external supply disruptions)

- Stimulation of alternative energy generation on the household level as well as commercially. This includes installation of solar panels by households that can afford to do so and further investing in WEB projects that substitute away from importing fossil fuels. The refinery of Aruba (RDA) should play a key role in actively pursuing this transition away from import dependence.

The list is undoubtedly incomplete, but I remain convinced that if in all we do we maintain the focus on the well-being of our people, the economy stands a fighting chance.


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