1. Business Environment in Aruba & Cape VerdeSubmitted To:Prof. Sukumar NandiSubmitted By:Section C Group 5Abhishek Anand(PGP26130)Kunal Ahuja (PGP26133)Nihit Jain(PGP26159)Vaibhav Kukreja (PGP26181)INDIAN INSTITUTE OF MANAGEMENT LUCKNOWVaibhav Sathe (PGP26182) PRABANDH NAGAR, OFF. SITAPUR ROAD, On04/02/2011LUCKNOW, UTTAR PRADESH - 226013

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CO NT EN T SContents ................................................................................................................................................... iAcknowledgement ................................................................................................................................. iiiAbstract .................................................................................................................................................. ivAruba ....................................................................................................................................................... 1 POLITICAL SITUATION ............................................................................................................................. 1 MACROECONOMICS ................................................................................................................................ 2 BUSINESS CLIMATE ................................................................................................................................. 6 BANKING SYSTEM ................................................................................................................................... 8 ENVIRONMENT AND CLIMATE .................................................................................................................. 9 NATURAL RESOURCES ............................................................................................................................. 9 SERVICE ORIENTATION .......................................................................................................................... 10 STRENGTHS .......................................................................................................................................... 10 CHALLENGES ........................................................................................................................................ 11Cape Verde ............................................................................................................................................ 12 POLITICAL SITUATION ........................................................................................................................... 13 MACROECONOMICS .............................................................................................................................. 13 BUSINESS CLIMATE ............................................................................................................................... 17 BANKING SYSTEM ................................................................................................................................. 18 ENVIRONMENT AND CLIMATE CHANGES ................................................................................................. 21 NATURAL RESOURCES ........................................................................................................................... 21 SERVICE ORIENTATION .......................................................................................................................... 22 STRENGTHS .......................................................................................................................................... 22 CHALLENGES ........................................................................................................................................ 22 FUTURE PROSPECTS .............................................................................................................................. 23Conclusion and Recommendations ...................................................................................................... 24References ............................................................................................................................................ 26TablesTable 1 Aruba GDP Trend........................................................................................................................ 3Table 2 Inflationary Trend in Aruba ....................................................................................................... 5i 3. FiguresFigure 1 Aruba location and map ............................................................................................................ 1Figure 2 National Flag ............................................................................................................................. 1Figure 3 Aruba Free Zones ...................................................................................................................... 8Figure 4 Cape Verde islands map and position ..................................................................................... 12Figure 5 Cape Verde National Flag ........................................................................................................ 12Figure 6 Ease of doing business in Cape Verde (Source: African Development Bank) ......................... 18ii 4. A C KN OWL EDG EM EN TWe thank Prof. Sukumar Nandi for giving us the opportunity to work on this project reportsubmission and provide valuable inputs and guidance throughout.We acknowledge and thank all those individuals instrumental in managing and maintaining IIMLucknow Library. The information we gathered, including and not limited to e-journals anddatabases was immensely helpful in understanding concepts and formation of this reportanalysis.We also acknowledge the work of numerous people and organizations collecting this financialand informative data referred in this report. iii 5. A B ST R A CTThe project aims to compare two countries namely Aruba and Cape Verde so as to evaluatewhich is a better destination for investment and business activities. To facilitate the analysis,macroeconomic data has been collected from various sources highlighting the GDP, its growthrate, fiscal deficit, inflation, population growth, spending power etc. Coupled with that, data onfiscal, monetary and business policies has also been collected for both the countries. Thefindings after comparative analysis using various parameters such as domestic and externalenvironment, political and social stability etc. suggest that Aruba serves as a better destination forinvestment and business where in sectors such as tourism prevail as the most prominent amongall.iv 6. A RU BAAruba is a 33 km-long island of the Lesser Antilles in the southern Caribbean Sea, located 27 kmnorth of the coast of Venezuela. Together with Bonaire and Curacao, it forms a group referredto as the ABC islands of the Leeward Antilles, the southern island chain of the Lesser Antilles.Aruba is one of the four constituent countries that form the Kingdom of the Netherlands,together with the Netherlands, Curacao, and Sint Maarten. Aruban citizens hold Dutchpassports. Unlike much of the Caribbean region, Aruba has a dry climate and an arid, cactus-strewn landscape. This climate has helped tourism as visitors to the island can reliably expectwarm, sunny weather. It has a land area of 180 square kilometers and is densely populated withits estimated 103,000 people. It lies outside the hurricane belt.Figure 1 Aruba location and mapArubaPopulation: 103,065 (2010 estimated)Area: 180 Sq. KmGDP: $2.4 Billion (Nominal)Government : Constitutional MonarchyFigure 2 National FlagCurrency: 1 Aruban Florin = 100 cents (Code: AWG, Sign: Afl.)POLITICAL SITUATIONAruba has been autonomous within the Kingdom of the Netherlands since separating formallyfrom the Netherlands Antilles in 1986. The island authorities have full control over internalaffairs, while the Netherlands has responsibility for defense and foreign affairs. The constitution1 7. was enacted in January 1986. Executive power rests with a governor, while a prime ministerheads an eight-member Cabinet. The governor is appointed for a 6-year term by the monarchand the prime minister and deputy prime minister are elected by the legislature, or Staten, for 4-year terms. The Staten is made up of 21 members elected by direct, popular vote to serve 4-yearterms. Arubas judicial system, mainly derived from the Dutch system, operates independently ofthe legislature and the executive. Jurisdiction, including appeal, lies with the Common Court ofJustice of Aruba and the Supreme Court of Justice in the Netherlands.There are no deep ethnic or religious divisions, living standards are high and the transfer ofpower is orderly within the framework of a parliamentary democracy. Institutions are robust andincome inequality is relatively low. The World Bank Institutes latest Worldwide GovernanceIndicators put political stability and government effectiveness above average for both highincome economies and the Caribbean region. In the event of crisis the Netherlands may providefinancial support. The Dutch government has also announced an enquiry into corruption on theisland. After elections, ruling party has changed. A generally market-oriented policy agenda canbe expected to be maintained.MACROECONOMICSEconomic structureArubas main industries are tourism, offshore financial services, transport - mainly shipping andoil refining. Tourism showed especially strong growth in the 1990s and as a consequence,tourism-related industries, particularly construction, have boomed, contributing to strongeconomic growth and to a low unemployment rate. The island possesses few natural resourcesand is heavily dependent on imports, including food and manufactures. Aruba enjoys one of thehighest standards of living in the Caribbean region. About three quarters of the Aruban grossnational product is earned through tourism or related activities. Before the "Status Aparte" (aseparate completely autonomous country/state within the Kingdom), oil processing was thedominant industry in Aruba despite expansion of the tourism sector. Today, the influence of theoil processing business is minimal. The size of the agriculture and manufacturing sectors alsoremains minimal.2 8. Main economic indicators (2010)GDP Trend YearGDP, real%GDP, %Real per% 1* change nominal 2* changecapita change GDP3*2000 1,873.5 6.61,873.58.720,678.45.52001 1,809.6-3.41,920.32.519,697.6 -4.72002 1,747.6-3.41,941.11.118,728.7 -4.92003 1,774.0 1.52,021.34.118,658.3 -0.42004 1,926.4 8.62,225.1 10.119,725.65.72005 1,965.6 2.02,323.54.419,529.9 -1.02006 1,986.9 1.12,421.54.219,321.2 -1.12007 2,014.8 1.42,602.57.519,372.20.32008 2,029.1 0.72,791.37.319,271.8 -0.52009 1,875.0-7.62,623.1 -6.018,874.4 -2.11* At constant 2000 prices, in million US$.2* In million US$.3* At constant 2000 prices, in US$.4* In US$.Source: CBS; CBA; ECLAC; CBS Netherlands Antilles. Table 1 Aruba GDP TrendPer capita GDP is relatively high at around USD 25,000. Tourism, mainly from the US (around70% of arrivals) dominates the economy, accounting for more than 50% of GDP. Oil refining (asingle refinery) is also important. Real GDP contracted in 2007 and 2008 and probably willdecline further in 2009 by 2-3%, as tourism has been hit by the US recession, exacerbated by oildemand weakening in 2009 affecting throughput of the refinery. With both tourism and oildemand recovering the economy should return to growth of around 1% in 2010.The fiscalbalance was in surplus in 2008 (1.1% of GDP) but largely as a result of transfers from theNetherlands government relating to the sale of hotels. However, in 2009 revenues have fallenwhile spending as continued to increase to cushion the impact of the recession. Overall, thedeficit could rise to 4.5% of GDP and will only narrow slightly in 2010. As a result thegovernment debt-GDP ratio will return to 45-50%.Monetary PolicyIn 2009, the principal monetary policy instrument at the CBAs disposal was the quantitativecredit growth restriction. This restriction implied that the commercial banks were allowed toincrease their outstanding bank credit by 5 percent in 2009 compared to the end of2008. During 2009, the CBA continued to work on its move towards a more indirect orientedmonetary policy, which would provide more flexibility in conducting monetary policy, as well aspromoting a more efficient financial intermediation. The CBA introduced a reserve requirement3 9. that mandated the commercial banks to keep 9.5 percent of their short term liabilities(excluding resident interbank deposits) at the CBA. These deposits do not earn any interest fromthe CBA and are excluded from the calculation of the prudential liquidity. For 2010, the CBAexpects domestic credit demand to remain weak, given the projected continuation of theeconomic contraction. Taking into consideration the economic data currently available and theforecasts for 2010, and after consulting with the Aruban Bankers Association, the CBA madethe following decision concerning the monetary policy for 2010: it removed the credit ceiling,increased the reserve requirement by 1.5 percentage points to 11 percent, andreintroduced Certificates of Deposits.The above described shift in monetary policy entails a more active and close monitoring andmanagement of banking credit development by the CBA. To this end, the bank is maintaining aclose watch on the financial and economic situation. It is reviewing its forecasts on a weekly andmonthly basis and making adjustments to its monetary policy if required. In this process, theCBA is making use of projections on a number of economic indicators, including Inflation Net foreign assets Banking sector credit Bank liquidity Gross domestic product.Balance of paymentsOverall outcome the current account of the balance of payments registered an Afl 282.7 millionsurplus in 2009, in contrast to an Afl 271.5 million deficit in 2008. This improvement resultedlargely from the shift to a surplus in the current account balance of the oil sector and, to a lesserextent, that of the rest of the economy (i.e., excluding the oil and free zone sectors) of theeconomy as well as the oil sectors recording of a net outflow in 2009 in contrast to a net inflowin 2008. Consequently, the balance of payments registered an Afl 206.3 million overall surplus ornet inflow of foreign funds in 2009, lower than the 2008 surplus of Afl 552.3 million. The lattersurplus was impacted positively by the 223.3 million Afl were paid by the Dutch government tothe Aruban government as the debt restructuring funds. 4 10. Inflationary Trend in Aruba Table 2 Inflationary Trend in ArubaGDP (current US$ Million) GDP per capita (constant3,000.002000 US$)20.00Thousands2,000.0019.501,000.0019.000.0018.50 2005 2006 20072008 20092005 2006 2007 2008 2009 GDP Growth Rate Inflation, consumer prices4(annual %)2 100 -2 20052006 2007 20082009 5 -4 -60 -820052006 2007 2008 2009-10 -5 5 11. Population, total Income payments (BoP, 108 current US$) Thousands 106600 Millions 104400 102 10020098 0 200520062007 2008 2009 2005 2006 20072008 2009Population growth (annual %)Population, female (% of2.5total) 260501.5 40 130200.510 0 0 2005 200620072008 20092005 20062007 20082009BUSINESS CLIMATE Arubas location, free-zone status and overall favorable business neighborhood makes it a perfect overseas location for export business. The free zone holds a strategic position for import from/export to North, South America, the Caribbean and Europe. Aruba has a very encouraging environment for starting new business both in financial and legal terms. Economic Promotion Policies The government has devised a future economic plan that focuses to: Stabilize social policy so that benefits of growth are widely and equitably distributed Dynamic domestic economy to stimulate efficient operation internationally Consolidate the finances of the government and provide better governance Increase productivity and provide education, training and technology for development Ensure consolidation and expansion of existing industries and assist in the creation of new firms by promoting a competitive business environment6 12. Provide appropriate infrastructure in telecommunications and regulatory framework.The promotion of small business is a priority for the government since small businesses adaptmore rapidly to changes in the market. They provide stability to the economy.Aruba Free ZoneThe political stability, a well-educated population, a pleasant and secure business climate makesthe Aruba free zone an ideal place for doing business. A free zone company in Aruba enjoysfollowing major financial benefits: 2% tax over all profits generated from free zone activities 0% import duties on goods imported and exported through the free zone 0% turnover tax over the turnover generated from free zone activities Exemption from foreign exchange commission on foreign currency payments No local partner is required to establish a free zone company (full foreign ownership) No import duties on equipment and machinery acquired for company use A US dollar account can be maintained ensuring efficiency in payments Retail sales to tourists, local sales possible No minimum investment capital required to start up a business in the free zone Custom clearance office located at the main gate of the free zones Modern control mechanism and clear regulations Flexible construction possibilities 24-hour security The free zones are located at short distance from the harbor and airportAruba Free Zone LocationsThe Free Zone presently consists of three designated areas in Oranjestad, Bushiri andBarcadera. The initial part of the Free Zone - Oranjestad Free Zone - is situated next to the harbor ofOranjestad and covers an area of 3.8 hectares. The harbor of Oranjestad is well equipped tohandle all kinds of vessels. The extended part of the Free Zone - Bushiri Free Zone - covers an area of 9.2 hectares andis situated at very short distance from the harbor. The distance between the Oranjestad and 7 13. Bushiri Free Zone and downtown Oranjestad is approximately 1 mile; the distance to theinternational airport is 3 miles.Figure 3 Aruba Free Zones The Barcadera Free Zone lies adjacent to the cargo port at Barcadera, 2 miles east of theinternational airport. It covers an area of approximately 90 hectares. The move to Barcaderais a crucial element in the development of the free zones.BANKING SYSTEMThe Central Bank of ArubaThe Central Bank van Aruba is a legal entity with an autonomous position within Arubas publicsector. With the inception of the Bank, the Aruban florin was brought into circulation, pegged tothe U.S. dollar at a rate of Afl. 1.79 = US$ 1.00. This exchange rate has remained unchangedsince then.ActivitiesThe Bank performs these tasks through a variety of activities, which include: Formulating and implementing monetary policy Supervising the activities of the commercial banks and other financial institutionsmonitoring their liquidity and solvency to protect the interests of depositors Managing Arubas official gold and foreign exchange reserves; Bringing bank notes into circulation to meet the needs of businesses and the generalpublic Issuing treasury bills and government bonds Monitoring economic and financial developments 8 14. Financial institutions present in Aruba Credit institutions -o Commercial banks e.g. Aruba Bank N.V, Banco di Caribeo Offshore banks e.g. Citibank Aruba N.Vo Credit unions e.g. Cooperativa di Ahorro y Prestamo Aruba (CAPA)o Financial institutions e.g. AIB Bank N.V., Island Finance Aruba N.V. Life and general (non-life) insurance Company pension funds Money Transfer Companies Trust Service ProvidersENVIRONMENT AND CLIMATEAruba is a generally flat, river less island in the Leeward Antilles island arc of the Lesser Antilles.Aruba is renowned for its white, sandy beaches on the western and southern coasts of the island,relatively sheltered from fierce ocean currents, and this is where most tourist development hastaken place. The northern and eastern coasts, lacking this protection, are considerably morebattered by the sea and have been left largely untouched by humans. To the east of Arubaare Bonaire and Curaao, two island territories which once formed the southwest part ofthe Netherlands Antilles; this group of islands is sometimes called the ABC islands.NATURAL RESOURCESApart from its beaches, the island possesses few marketable natural resources. So, agriculture andfishing are small contributors to GDP. Rainfall is sparse, although some rain usually fallsbetween December and March. There are no rivers or other natural water resources and asdrinking water is scarce, a significant amount is produced by desalinating sea water. 9 15. SERVICE ORIENTATIONThe closing of the Exxons Lago refinery in March 1985 impacted employment and Arubaseconomic growth. As a result, the Aruban government decided to shift its focus from oil refiningto tourism. The pearly-white beaches, clear blue sea, 360 days of sunshine and relaxingatmosphere were the ideal ingredients for a success story here.With over 600,000 tourists visiting Aruba annually, tourism has today become important pillar ofthe economy. The direct share of tourism in GDP is estimated at over 20%. An overallawareness of the importance of tourism and its interdependence with other economic and socialactivities is emerging. Tourism has not only brought foreign currency to Aruba, but also largehotel chains and many immigrant workers from neighboring countries who work there. Many ofthe larger hotels are foreign-owned, or investments are paid for with foreign loans. The outflowof interest and dividend payments is said to be considerable.However, the relatively large influx of immigrant workers has become a major source of socialproblems in a small island community such as Aruba. The local infrastructure, like schools andhousing, is having trouble coping with the population growth.STRENGTHS Infrastructure: Aruba is making huge investments in order to maintain and expand thephysical infrastructure. The airport facilities have been expanded, while the water andelectricity plant and the telecommunication facilities are also being upgraded regularly toensure the required levels of service and efficiency. Aruba has modern physical facilities withgood roads and up to date utilities. It has a modern and well developed communicationinfrastructure. Legislation: In Aruba, there is a well-established legislation in force, which has created aninvestment friendly environment through a combination of tax policies. Freezones: Freezones have proved to be the growth engines of Aruba. They have helpedthe post-recession growth of Aruban economy. Strategic location: Aruba is strategically located to serve the international business betweenSouth America, the United States, and Europe with direct sea and air connections.10 16. Educated, Multilingual workforce: Aruba has an educated, multilingual and friendlyworkforce. Education is based on the Dutch educational system. Dutch Judicial System: Arubas judicial system operates independently of the legislativeand the executive powers. Jurisdiction, including appeal, lies with the Common Court ofJustice of Aruba and the Supreme Court of Justice in the Netherlands. Quality of Life: Aruba has a quality of life featured by a high standard of living, modern andwith all kinds of amenities and services, while maintaining an informal and affordable lifestyle in a tropical and safe environment.CHALLENGESFollowing are the social, political and economic risks that country may face. Credit Crunch: Risks are mainly external because of the open nature of Arubas real sectorand the small size of the economy. Since, tourism is mainly dependent on USA, dependingupon the duration and depth of the credit crunch, it imposes larger constraints on consumerspending than expected. Inflation: There is also uncertainty surrounding the inflation pressures as inflation pressuresaround the world may prove more persistent than expected. This would lead to a lower realGDP and depressed consumption.11 17. C AP E VE RDECape Verde is a tiny island country located in central Atlantic Ocean, near coast of WesternAfrica (Sub-Saharan Africa Region). It comprises of 10 islands and 5 islets, 3 of which aremountainous. These uninhabited islands were discovered and colonized by Portugal in 1500s. In1975, it achieved independence after a brief struggle.Figure 4 Cape Verde islands map and positionSevere droughts in 20th century resulted in deaths of over 200,000 people. It initiated massiveemigrations. Today, there are more people of Cape Verde origin outside the country rather thaninside. Even today, the country is heavily dependent for food on imports and sometimes in formof aid.Politically Cape Verde has a very stable democracy today. It has shown notable economic growthand improved living conditions significantly despite of lack of natural resources. It is classified asDeveloping Nation. It has established close ties with United States and enjoys considerablyhigher per capita income compared to other West African nations. The Republic of Cape Verde Population: 512,000 (2010) Area: 4000 Sq. Km. HDI: 0.534 (Rank 118) GDP: $1.84 Billion (PPP), $1.7 Billion (Nominal) Currency: 1 Cape Verdean escudo = 100 centavosFigure 5 Cape Verde National Flag12 18. POLITICAL SITUATIONSince adoption of democracy in 1991, the country has demonstrated stability in the politicalsystem. All its political parties are committed to the developmental reforms and hence, there isno significant change in the policy when ruling government party switches after elections. This isa very favorable situation, especially when compared against other nations in sub-Saharan Africa,which are infamous for political instability.The country also enjoys significantly favorable position in parameters like Political rights,Stability and Civil Liberty compared to other sub-Saharan African countries.MACROECONOMICSCape Verde has recorded one of the most impressive economic performances in Africa. Its GDPhas grown at a rate of 7%, with inflation of 6.8%, the budget deficit 1.2% of the GDP and debtbrought into control by the country in the year 2008.The main factors of growth are the tourism industry, the investment rate rose to 48% of GDP in2008, remittances (foreign inflows) from the Diaspora, FDIs etc. The global crisis affected theexternal sources of financing. To offset this, the Government put in place a contra-cyclicalpackage of measures: Easing tax on household and corporate income A 4 billion public investment program Increased social transfers to vulnerable familiesAlthough Governments response has been timely in stimulating demand and investment, on theother hand this has led to a sharp deterioration of the public finance deficit to over 9% in 2009.The current account situation has also degraded. The IMF is projecting a 3.5% growth for 2009and 4% in 2010, representing the lowest economic performance since 2000.Economic Context 13 19. Cape Verde owes its economic and social progress to the implementation of successive reformprograms with thrust on good governance. Since2006 it has been pursuing a program backed byan IMF Economic Policy Support. This program is aimed at assisting the Government to: Reduce macroeconomic risks Resist external shocks better Prepare for the long term decline of concessional aidThe country is facing economic and demographic challenges related to : Insularity constraint Fragmented nature of its territory Small size of its population Scarce natural resourcesIt is also vulnerable to risks mainly related to the external origin of its sources of financing, theeffects of which became evident with the current global crisis and the attendant decline of flows. Import/ExportOn account of heavy reliance on imports and very marginal exports, Cape Verde has a hugecurrent account deficit. It is balanced by financial aid it receives and the remittances that CapeVerdeans residing outside the country make to their relatives. These remittances contribute toapproximately 20% of the GDP.Fiscal and Monetary PoliciesCape Verde development model is based on a rigorous management of the macro-economicframework and monetary policy under successive reform programs supported by itsdevelopment partner countries mainly from Europe.Monetary Policy: Emphasis has been on measures aimed at : Consolidating the independence of the Central Bank (BCV) Supporting the peg of the currency Escudo to the Euro Capturing the savings of expatriates by providing attractive interest ratesThe monetary policy has achieved the objective of controlling inflation which has neverexceeded 6% since 2000, and mobilizing the savings of the Cape Verdean Diaspora thatcontributed to maintaining the level of international reserves. However, since the monetary14 20. policy has been restricted to some extent, it has restrained access to credit by the private sectorsuch as SMEs/SMIs, thereby affecting the business climate.Fiscal Policy: It is designed to reduce the fiscal deficit and the domestic and external publicdebt without over-burdening the tax ratio. Therefore the emphasis has been on improving taxcollection and justifying public expenditures. The public deficit was reduced from 19.5% ofGDP in 2000 to 1.2% in 2008. Also, the external debt is sustainable.The countrys financial environment is robust. The credibility of the budget and parliamentarycontrol procedures are in line with international good practices. Moreover, the country has beenreceiving active assistance since 2005 from the Budgetary Support Group (BSG).Despite these advances, risks persist. First, which is structural, resides in the weak performance of some State-ownedenterprises, notably the National Air Transport Company (TACV) and Electra (the waterand electricity company), whose 2008 deficit amounted to EUR 9.9 million. Second, which is cyclical, relates to increased public spending stemming from theGovernments fiscal package designed to offset the impact of the global economic crisis.GDP (constant 2000 US$) Income payments (BoP, current 1000US$)Millions800100Millions806006040040200 2000 2005 2006 2007 2008 20092005 2006 2007 2008 2009 Rural population (% of totalCash surplus/deficit (% of GDP) population) 4 44 432 42 410 4012345 39 -2 3820052006 2007 20082009 -4 15 21. GNI per capita, PPP (current GNI (current US$)international $)1600Millions40001400120030001000 8002000 6001000 400 200002005 200620072008 20092005 2006 2007 2008 2009 GDP per capita (constant 2000 Foreign direct investment, net US$)inflows (% of GDP)2000 151500 101000500 5002005 200620072008 2009 2005 2006 20072008 2009Exports of goods and services (% GDP growth (annual %) of GDP) 1530 1020105002005 2006 200720082009 2005 2006 20072008 2009Inflation, Consumer pricesPopulation, total(annual %)510Thousands8 5006 490480447024600 2005 2006 2007200820092005 2006 200720082009 16 22. Population, female (% of total)Population growth (annual %) 60 2.5 502 401.5 30 1 20 10 0.500 200520062007 2008 2009 2005 20062007 2008 2009 BUSINESS CLIMATEOn Doing Business Report, Cape Verde is ranked 143rd. It is below average compared to sub-Saharan Africa. This is primarily due to bureaucracy and rigidity of the labour market.BureaucracyThere is no preventive regulatory and judicial system in existence for business management.There is no framework and policy with respect to liquidation of assets and bankruptcy. This hascreated large vacuum which results in several delays.The new service launched as Citizens House in 2009 is expected to address these issues andimprove the situation. Labour MarketThere are strict restrictions on lay-offs, including during recession times and economicdifficulties. Average cost of dismissing a worker is around 93 weeks, which is very highcompared to global average.New labour laws passed in 2008 added certain flexibilities, however still certain restrictionsincluding fixed-term contract maintains the rigidity of the system to large extent.17 23. Figure 6 Ease of doing business in Cape Verde (Source: African Development Bank) BANKING SYSTEMRecent Developments in banking system are mostly related toa) Aid Coordination with other foreign entitiesb) Positioning of the Bank.Aid CoordinationA Budget Support Partnership (BSG) between the Government i.e. Ministry of finance of CapeVerde, the World Bank, EU, Netherlands, Portugal, Austria, Spain and the Bank was put in placea few years back. Under that arrangement, the Government, the technical partners and thefinancial partners agreed to: Harmonize indicators and priority actions for budget support Undertake joint budget support reviews Synchronize disbursements to reduce the transaction cost of assistance The UNDP monitor the developmental goals indicators 18 24. Positioning of the BankThe entire bank portfolio for Cape Verde amounts to UA 17.53 million, of which UA 7.54million has been disbursed. The average timeline of the portfolio is 3.2 years, and the averageannual disbursement rate of 18.4. The low annual rate is attributable to factors related to delaysin start-up operations and the procurement process.The 2009 portfolio review indicates the overall performance is satisfactory. The country hassucceeded in the delicate task of safeguarding its stability while undertaking the necessaryreforms, implementing economic and social development policies that take recognition of theneeds of poverty reduction, and ensured Government ownership of these policies.Why is Bank Group Assistance needed?Given the vision and options of the country, the Banks strategy highlights good governance toenable the country to consolidate its gains and infrastructure since it will drive tourism, theengine of growth, and enhance the competitiveness of the economy. The two strategies andtargets imperative for success: Support good economic and financial governance gains Contribute to infrastructure developmentSupport Economic and Financial Good GovernanceSupport for the Modernization of Government based on strategy for overhauling the civilservice, the organizational, institutional, legal, tax and digital reforms for resizing theadministration. It will also strive to implement tax simplification measures stipulated in the newtax and customs code. In terms of institutional reforms, the Banks budget support operationswill back measures to restructure the Ministry of Finance to make it more effective in terms of: Macroeconomic analysis and projections Financial resource mobilization Strategic planning.Pursue the strengthening of public finance managementCape Verdes public finance management system and the legal framework have beenstrengthened considerably in recent years. However, there are challenges regarding theeffectiveness of the tax recovery and internal audit performance. 19 25. Deepen the reforms aimed at optimizing public expenditure allocation. The effective functioningof the new public procurement system based on international standards is another key objectiveto be achieved to optimize public procurement.Improve the Business Climate and Enhance CompetitivenessThe Bank will encourage the Government to take the necessary steps to ensure that Cape Verdemoves up to 132nd in the doing business report, from its current 143rd ranking. Somebottlenecks to be removed are formulation of a legal framework for distressed enterprises, withprovision for preventive settlement, legal redress, bankruptcy and liquidation of assets. Focus isto be on building the capacity of local business owners, improving access to credit for SMEs andaddressing the main constraints of private investments. Contribute to Infrastructure Development and ModernizationEnhance Transport Infrastructure DevelopmentThe development of transport infrastructure is crucial for reducing the constraints and costs ofinsularity, improving competitiveness, and positioning the country as an international transporthub. The Bank will finance the development of airport and harbor infrastructure.Reduce the Energy Production Deficit through Infrastructure DevelopmentThe ultimate goal is to improve Electras financial situation and reduce the amount ofGovernment transfers from EUR 3.8 million in2008 to EUR 2.0 million in 2010.Contribute to Mitigating the Effects of Climate Change and Water ResourceMobilizationThe reduction in rainfall coupled with the intensive exploitation of groundwater has beenaffecting farming activities and food security. The Bank will assist the Government to undertakea study on water harvesting and assisting the country through its Climate Risk Management Non-lending OperationsThe Bank looks to maintain its dialogue with the Government through economic and sectorwork regarding: insularity cost to identify the major bottlenecks and policies to minimize them; economic and financial impact of regional and global integration (WTO) 20 26. tax competitiveness of Cape Verde private sector profile to identify potential and constraintsThe Bank will organize awareness seminars, use Fund to finance the preparation ofprojects/programmes, feasibility and sector work studies for generating new businessopportunities.Potential Financial & Banking RisksRisk of increased debtThe decrease in direct tax revenue stemming from the tax package and customs tariffs associatedwith various trade agreements (WTO, ECOWAS and EPA) pose potential risks to publicfinance. The tax package will increase the fiscal deficit. The Government may be tempted toresort to non-concessional borrowing to finance the deficit, and this could jeopardize debtsustainability.However, an improvement in tax collection, good macroeconomic governance and the effects ofthe expected recovery of the tax package mitigate this risk. Cape Verde can also count on theBSG, including the Bank and the PSI, to monitor the macroeconomic balances, especially non-concessional borrowing. Some development partners have reduced the amounts of grants andconcessional financing. This risk is mitigated by the fact that the majority of developmentpartners, including the Bank and the World Bank. Other bilateral partners, namely Portugal andSpain, have increased their concessional financing.ENVIRONMENT AND CLIMATE CHANGESFresh Water is the biggest environmental concern. As rainfall is decreasing and groundwaterlevel is falling, it is impacting industries and primarily already troubled agriculture sector.Country also faces challenges from Global warming including rising sea levels. Its coastlines andforests are threatened by climatic changes in sub-Saharan region. NATURAL RESOURCESCape Verde has scant natural resources including fresh water. As a result, only 4 out of 10 islandscan support agricultural production. It is prone to droughts and has a very little arable land.Finally, Cape Verde ends up satisfying more than 90% of its food requirement through imports.21 27. Fishing potential of Cape Verde is not fully exploited. It does not have any oil, natural gas ormineral resources.SERVICE ORIENTATIONMore than 70% of GDP comes from services. The economy is dependent on commerce,tourism, transport and public services. Approximately 70% of the population lives in rural area.However, contribution of agriculture in GDP is extremely low (10%). STRENGTHS Tourism: Country enjoys preferential position in International Tourism due to its geo-climatic environment and investments in hotel industry. It has become primary source offoreign exchange and economic growth. Strategic Location: Cape Verde is situated at crossroads of Africa, Europe and Americas.With such a location like Singapore has, country can become the hub of International Airand Maritime transport. Computerization of administrative services and existence of institutions like CitizensHouse are significant achievement and give strategic advantage compared to other sub-Saharan countries. WTO member: Cape Verde is integrated member of regional and global economic network.It has initiated negotiations and discussions on opening its market economy and investmentsubsidies to attract investors. Non-conventional Energy Sources: It has huge potential in non-conventional sources likeSolar, Wind and Kinetic energy due to its location. Use of this clean energy would alsoaddress environmental issues that it is facing today.CHALLENGESFollowing are the social, political and economic risks that country may face. Labour Costs: Cost of the labour is higher than many countries like Indonesia, Philippines,Mauritius and South Africa. 22 28. Transport Infrastructure: Foreign markets accessibility is difficult to lack of air and marinetransportation facilities and high cost. Also, due to archipelago of 10 islands, movement ofgoods and labour within the country is also very costly and inefficient. Energy Security: Access to electricity and energy sources is also a major concern in order tosetup businesses in this island country. Setting up electricity plants is extremely costly as itcant be transported across islands, hence requires setting up plant on each island. Thisresults in loss of economy of scale advantage. Undeveloped Market: Domestic market is narrow and has numerous export challenges dueto above reasons. External Dependency: Cape Verde economy is not diversified sufficiently. It is susceptibleto external shocks due to its dependency on remittances, tourism, foreign investment andfinancial aid.FUTURE PROSPECTS Despite lack of natural resources, sound economic management has resulted in steadyincrease in per capita income. Continued economic reforms are aimed at increasing private investment and attractingforeign direct investment. Government has initiated investments in non-conventional and renewable energy sources. Government intends to develop regional transportation hub for International Air andMaritime transport. Development of such infrastructure would drive huge revenues to thecountry. However, countrys progress would depend on maintaining the flow of aid, continuedincrease in tourism, remittances. The momentum of Governments development agenda and investment policies shouldcontinue. 23 29. CO N CLU S IO N AN D R ECO M ME NDA TI ON SFrom the perspective of a potential investor or a businessman, it is crucial to evaluate theattractiveness of the two countries and make an informed and rational choice. The parameterson which evaluation should be done are as follows. Domestic demand Monetary Incentives in the form of tax subsidies, duty cuts etc. Non-monetary incentives such as labor laws, legislative system etc. Political, social and economic stability Resources- both natural and human resources Macroeconomic outlook in terms of fiscal deficit, BOP deficit/surplus etc.Domestic DemandThe most reliable measure for domestic demand is GDP per capita and living standards ofpeople. GDP per capita of Aruba is US $25000 which is far higher compared to that of CapeVerde whose GDP per capita is around US $2000. Also, in terms of living standards, Arubascores over Cape Verde and hence Aruba presents a better and more attractive domestic marketfor foreign businesses to earn decent return.Monetary IncentivesAruba has a free zone system where zero import duty, zero percent tax on turnover and very lowtax rates on profit (2%) are levied and hence gives a lot of benefits to the businesses where as nosuch policy has been heard of from Cape Verde. Hence, Aruba has a comparative advantage as abusiness destination.Non-monetary incentivesAruba offers a lot of incentives as a part of its free zone policy such as 100% FDI, a flexiblepolicy system (both legislative and judicial) and better infrastructure compared to Cape Verdewhere the system is inflicted with bureaucracy and rigid labor laws due to which Cape Verde hasa poor rank of 143 as a business location.24 30. Political, Social and Economic StabilityBoth the governments are democratic in nature and good in governance and hence stability ispresent in the system. However, Aruba has lesser income inequality which brings more socialstability to the system. Also, though both the countries are highly vulnerable due to highdependence on tourism but Cape Verde also has a significant share of remittances and lessernatural resource which adds more volatility to its economic environment.ResourcesAlthough both the countries lack in resources, however Cape Verde shows more scarcity asdemonstrated by its higher current account deficit than Aruba. Also, Aruba has better workforcein terms of education and multi lingual ability.Macroeconomic scenarioCape Verde has a lesser fiscal deficit (1.2 % of GDP) than Aruba (4.5% of GDP projected) andalso the growth rate of Cape Verde has been 3-4 % in 2009 despite recession where as theeconomy of Aruba contracted 2-3% during the same time. Inflation also supports Cape Verdewhere inflation has been brought down to 1.5% compared to Cape Verde where inflation isaround 4%. Also, high CRR (11%) and simultaneous credit loosening in Aruba makes it aconfusing system. Hence Cape Verde clearly looks better than Aruba, however Cape Verde isdependent on Aid which would decrease in the near future hence lessening the positive scenarioas fiscal deficit would increase which would force government to curb deficits and hence curbgrowth through increase in taxes.ConclusionOn the basis of the above analysis, Aruba forms a better choice than Cape Verde as a businessand investment destination. The sectors most favorable for investment include mainly tourismand hospitality as overall awareness of the importance of tourism and its interdependence withother economic and social activities is emerging and the share of tourism in GDP is rising andalso it can be used for establishing premium retail chains due to high living standards, 100 %FDI and high population growth and scarcity of resources which enables to keep the marginshigh. Also, economic recovery is likely to drive up tourism activities which in turn would increasethe incomes and drive up domestic demand.25 31. REF ER EN CE S1. Cape Verde The World Factbook, Central Intelligence Agency, USA retrieved from www.cia.gov on Jan 30, 2011.2. Cape Verde country profile, BBC UK retrieved from www.bbc.co.uk on Jan 31, 2011.3. Cape Verde - Country Strategy, African Development Bank 2009 retrieved from www.afdb.org on January 31, 2011.4. Country Profile on Businessmonitor database under Caribbean section on Aruba.5. Aruba - The World Factbook, Central Intelligence Agency, USA retrieved from www.cia.gov on Jan 30, 2011.26