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I think that the Vicky 1 system was actually better than the current one. There was a "colonial" quality infantry type which was available to the colonial pops. I frequently used colonials to fight my wars in well, the colonies. I ussually augumented them with a few brigades of regulars and artillery. This should be back IMO.
 
They shouldn't actually be that much less effective than Europeans, but you should take a prestige hit for using them.

If the Dutch recruit massive Javan armies, it just goes to show how puny Dutchmen are and Dutch prestige should suffer so much they get laughed out of GP status.