The recovery of the Dutch economy

First insertion on Heterodox Gazette Sam de Wolff: 23 december 2017

E.A. Bakkum is a blogger for the Sociaal Consultatiekantoor. He loves to reflect on the labour movement.

After a deep recession during the early eighties of the last century, the Dutch economy has developed quite well, also in comparison with the European neighbouring states. This is caused by a package of radical social reforms. The present column illustrates this development with the help of economic indicators, such as the economic growth, labour participation, the costs of insurance for the disabled, the participation of older men, the labour productivity, and the investment quote.

The case history in short

The period 1962-1982 in the Netherlands is characterized by an economic decay. The increasing social collapse is analyzed in detail in two previous columns. The two primary causes can be identified fairly easily. First, the workers succeed in extorting excessive wage rises, with as extremes a real increase of 7% in 1964 and 8% in 1969. It is obvious that these rises are disastrous for the international competitive position. Second, the ideological pillars (catholic, protestant, socialist) rapidly lose their support within the population. The authority of the ideological leaders disappears, so that they can no longer energetically defend the general interest.

On a closer inspection, these two explanations, namely the wage explosion and the lost authority, are more the symptoms than the deeper cause of the economic decay. These fundamental causes can only be found by an analysis of the social structure, that is to say, of the system of institutions, which guide and limit the social behaviour. Viable institutions must offer a latitude for the social progress (innovations), which emerge from the system itself and from its environment. Apparently this was not the case in the corporatist order, which the Netherlands installed immediately after the Second Worldwar. This is in essence an internal development. The pillars tried to continue their existence and power by the establishment of various bodies of public law. Institutes such as the Socio-Economic Council (SER) were paternalistic, which fitted poorly with the rise of individualism1.

Moreover, the corporatism was combined with central planning, which leads to unsatisfactory economic results. Notorious is the guided wage policy, which curbed the wage rise in a top-down manner. This institution was favourable in the short term, but it caused social tensions, which explode in the long run, with serious consequences. All these problems are made worse by foreign influences, which stimulated progress. The economy (trade, and later also the production) becomes more and more international. This can not be reconciled with the national planning. Furthermore, globally a movement of counterculture emerged, which has undermined the existing authority. It began in the United States of America, but in 1966 it also obtains a foothold in the Netherlands. It had the New Left as its political component, an individualistic and unfortunately also destructive current.

Thus in 1982 the Netherlands had got in a position, where politics found it difficult to govern. A typical symptom was the cabinet Van Agt 2 (CDA - PvdA - D66), which already fell after a month in office, and again after nine months. This instability must mainly be attributed to the ideological confusion of the social-democracy. Since 1980 the Netherlands got in a deep economic recession, which actually had been provoked by the second oil crisis of 1979. In this situation of a general slump at last the sense of urgency arose, which is needed to realize institutional reforms. Under the cabinets Lubbers (1, 2 en 3) and subsequently the Purple cabinets Kok (1 and 2) a complete package of improvements was realised. The present column sketches the results of this social innovation.

The economic development

In this paragraph the Dutch developments after 1982 are illustrated by means of several economic time series of essential policy indicators2. They show how the Netherlands performs in comparison with the neigbouring European states. Als points of reference, notably Belgium, Germany, Great Britain, and Sweden have been chosen. It is interesting, that these states differ in their social order. The first two states are of the continental type. Their order resembles corporatism. The social order of Great Britain is Anglosaxon. Its policy is liberal. Sweden is an example of the Scandinavian type, which is also called social-democratic. The data originate from the files of the OECD, of the Worldbank and of (at least in the past) the Groningen Growth and Development Centre3.

The growth of the gross domestic product (in short GDP) illustrates well the economic performances, despite the common criticism with regard to this indicator. The figure 1 shows the development between 1970 and 2010 (source: OECD). It is extremely informative. Consider for the sake of convenience the Belgian curve as a reference. In 1970 the Netherlands is clearly wealthier, but in 1982 the difference has gone4. However, the Dutch reforms are successful, and since 1985 there is a return to the old growth path. The German curve could also function as a reference, but in 1990 the FGR and the GDR are united. The establishment of a market economy in the former GDR affects the West-German welfare.

The growth path of Great Britain is not very salient. After 1979 the government Thatcher reforms the British economy. For a moment this causes stagnation, but after 1983 the tide turns, and in 1988 the Netherlands are even (temporarily) surpassed5. In the Swedish growth path the serious recession since 1991 is apparent. It takes until 1995, for Sweden to recover. This makes clear, that the Scandinavian model is rather less solid and attractive, than some believe.

Figure of economic growth
Figure 1: GDP per inhabitant (in $ of 1990) for the
    Netherlands, Belgium, Germany, Great Britain and Sweden
Figure of economic participation
Figure 2: Participation (number of jobs per inhabitant) in the
    Netherlands, Belgium, Germany, Great Britain and Sweden

At first sight the Dutch development since 1982 is not exceptional. For, the figure 1 suggests, that there is simply a return to the old growth path. However, the package of reforms since 1982 did change the economic structure. This is apparent from the figure 2, which shows the number of jobs per inhabitant (source: GGDC). In this indicator the German curve is a good reference, because it is fairly constant, despite a small growth due to the German unification in 1990. The readers may see, that since 1985 the Dutch participation on the labour market increases for a long time. A previous column has shown, that this rise partly results from an increased participation of women in the labour process. Therefore many of the new jobs have a parttime character.

Besides the inflow of women, the economic growth contributes to the increasing degree of participation in the Netherlands (see the figure 1). However, the comparison with other states shows, that there the participation is less stimulated by the economic growth. Apparently, the Dutch reforms and the new economic institutions do matter for success. Conversely, the figure 2 shows, that the Scandinavian model fails after 1991, and the traditionally high participation does not recover. This model disappoints, at least in Sweden. It is also worth noting, that apparently the British recession in 1992 has clear negative and lasting consequences for the participation.

The figure 2 shows, that until the seventies the Dutch participation is lower than in the neighbouring states. But thanks to the reforms the Netherlands starts to outdo them during the period of the Purple cabinets. The figure 3 presents an additional reason for this. It shows how much the states spend on benefits for the disabled (source: OECD). Until 1994 the Dutch expenditures are larger than those of the other states. Around 1990, the Dutch situation is dramatic: the percentage of the disabled is about twice the percentage in other states6. In this year the prime minister Lubbers must conclude: "The Netherlands is sick". A previous column has concluded, that under the the direction of the social partners these benefits have been abused on a large scale. Especially the older workers are dumped in the arrangement for the disabled.

Figure of the expenditures for the disabled
Figure 3: Expenditures for the disabled in the Netherlands,
    Belgium, Germany, Great Britain and Sweden
Figure of percentage of older male workers
Figure 4: Percentage of older male workers (55-64 jaar)
    on the labour market in the Netherlands, Belgium,
    Germany, Great Britain and Sweden

However, the cabinet Lubbers 3 reforms the transfer system for the sick and disabled. First, the level of the benefits is reduced. This measure moderates the income. Under the Purple cabinets, higher thresholds are installed for the access. The measures not only diminish the unfounded claims, but they also remove an incentive to remain passive. It is also worth noting, that the figure 3 is partly determined by the form of the national institutions, and therefore can present an overly negative picture of the Dutch treatment of older workers. The other states do not necessarily have better morals than the Netherlands. For instance, Germany has prematurely retired many of the superfluous older workers. It is true that this is not an abuse of facilities, but nevertheless it is yet the discarding of productive people.

The treatment of older workers is again analyzed in the figure 4. It shows the share of male workers in the age category of 55-64 on the labour market (source: OECD). It turns out that originally the participation decreases, despite the emerging aging of the population. But around 1995 the tide turns, and the states establish institutions, which further the working at a higher age. The regulations for premature retirement become more sober, and the age for retirement is even increased. Also, a moral break is propagated, where enterprises are incited to value the input of older workers more. The Netherlands does not excel in this international trend, but it does enthusiasticly join it.

Figure of labour productivity
Figure 5: Labour productivity per hour (in $ of 1990) for
    the Netherlands, Belgium, Germany, Great Britain and Sweden

The previous figures sketch a rosy picture of the Dutch reforms: they have yielded more paid jobs for the citizens, and they have put back the growth of the welfare on a high level. However, the reforms have also caused effects, which preferably had to be avoided. This is visible in the figure 5, which shows the labour productivity (in short ap) per worked hour. Here the Belgian curve is a good reference. It is immediately clear, that the Dutch ap belongs to the highest in Europe. But after 1980 the Dutch ap grows less fast than those of the other European states. It grows approximately as fast as those of Germany, which since 1990 suffers from the poor labour morals in the area of the former GDR. A moderate growth of the ap is necessarily accompanied by a moderate rise of the wage level. In this manner, the Dutch welfare could be affected in the long run.

The decreasing growth of the labour productivity is caused by the new employment, which is created mainly in the service sectors. It is difficult to make the supply of services more efficient, and to thus improve their ap. Consider health care, or the restaurant and catering industry7. Those who want to rapidly increase the labour productivity, do well to create jobs in the industry. For, thanks to the technological progress in the industry more and more production processes can be computerized. But this also creates some problems. First, the computerization finally leads to an almost jobless growth. Second, increasing investments affects the wage fund, because they must both be paid from the national income. The workers forgo consumption in the short term, in order to consume more in the long run. See the columns about the three-sector model of the Russian economist Feldman8.

Nevertheless, it is conceivable that at present the Netherlands does not invest sufficiently, in comparison with other European states. Then the ap could stagnate. Therefore it is interesting to study how the investments develop. The figure 6 shows the investment quote, namely the share of the investments in the national income (source: the Worldbank, which calls it gross fixed capital formation, in short GFCF). First it must be remarked, that the GFCF is a package of various capital goods, including infrastructure, real estate, and even stocks9. Between 1970 and 1985 the GFCF decreases everywhere in Europe, because the economic structure transforms, where the industry becomes relatively less important. The citizens spend a larger part of their income on services, which are consumed directly. It is clear, that the relative decrease of the investments in the Netherlands is not exceptional for Europe10.

Figure of investment quote
Figure 6: Investment quote (GFCF) for the Netherlands,
    Belgium, Germany, Great Britain and Sweden

After 1985 the GFCF stabilizes somewhat everywhere, although significant differences appear between the various states. For instance, in the Netherlands the building trade shrinks after 2008, because the prices of houses diminish. In the British and Swedish growth paths the figure 6 clearly shows the recession of 1991 and beyond11. Incidentally, the transformation to a structurally lower investment quote (GFCF) must not be interpreted as a neglect of the productive branches. Namely, first, an increasing part of the national income is invested outside of Europe, where the profits on capital are higher. But such investments do not contribute to the national GDP, and they do not raise the domestic ap. They hurt the wage sum, but on the other hand create additional income from capital, which can be used to pay for instance pensions and insurance payments.

Second, the West-European states develop into knowledge economies, were the investments are mainly in human capital. This is evidently not included in the GFCF (only fixed capital). It is the counterpart of the first factor. For, since now the European industries suffer from the global competition, higher profits must be realized by supplying highly valued services. Each economic structure requires its own typical level of investments in capital goods. As a third factor it is sometimes mentioned, that nowadays the enterprises more often rent capital goods instead of buying them. Your columnist accepts this argument without reflection. Perhaps this allows to use the stock of capital goods in a more effective manner. All in all, the flattening of the European labour productivity seems to be inevitable12.

Nonetheless, each state can have some control by means of smart policies. For instance, the state can stimulate industrial innovation. And unfair competition can be blocked, for instance from states, which allow child labour and other forms of exploitation. Also, environmental norms can be imposed on import goods of states with a reputation of ignoring contamination. Here is must be immediately mentioned, that such arguments are sometimes abused by domestic interest groups, which want to protect their own production against foreign competition. Then one has rent seeking, because the product prices are unnecessarily high.

The conclusion of the present paragraph is, that the Dutch package of reforms since 1982 indeed has improved the domestic economy (and the welfare of the citizens). The affection of the labour productivity remains a point of concern. The Netherlands must always be alert that its innovative power is reinforced, when possible in the industry, which promices huge gains. This empirical analysis has undoubtedly made the reader curious about the package of reforms under the cabinets Lubbers and Kok. Also, the question rises, why nevertheless the policy of the Purple cabinets was criticized by the CDA politician J.P. Balkenende and, in more fierce words, by the writer and advisor W.S.P. Fortuyn. This all will be elaborated in a future column.

  1. In the Netherlands the fifties of the last century are characterized by a social pressure to conform. The religious preachers still were able to dictate to large parts of the population, what they were allowed to read, and which associations they could join. Therefore, at first sight the social cohesion was strong. Your columnist has not consciously experienced this era, but yet suspects, that the social order was felt by many people as a stifling of their personal freedom. (back)
  2. Those who are interested in other indicators, also of other states, can consult the columns about economic statistics and about the radical centre. (back)
  3. The web pages of the data files can be found here: OECD, Worldbank, and Groningen Growth and Development Centre. The files are obviously updated regularly. Your columnist had already copied the GGDC file in 2010. All files are used without any verification of their soundness. Strictly speaking a personal check does seem necessary. For, international comparisons are very complex, because each state has its own institutions. This can easily lead to unsound comparisons. But since the present column wants to analyze merely the general economic trends, it does not make much sense to correct the graphs for possible errors in the files. That would go beyond the present means of your columnist. (back)
  4. The Dutch wealth is not necessarily caused by a better government. Perhaps it is caused by the extra income due to the sales of natural gas. According to p.98 in A Dutch miracle (1997, Amsterdam University Press) by J. Visser and A. Hemerijck in 1980 the gross wage costs of a Dutch enterprise were 91% of the nett company income! Thanks to reforms they have already in 1985 fallen to 84%. Incidentally, during the period 1983-1996 the wage share in the nationally added value falls with yearly 0.8% (p.110). (back)
  5. On p.375 in Inspelen op Europa (1993, Academic Service), edited by J.J.M. Kremers, J.P. Balkenende states, that the continental (Rhineland) model performs better than the Anglosaxon model. The figures in this column seem to confirm his statement. However, the Anglosaxon model has the excellent reputation, that it always keeps the unemployment rather low. Your columnist believes, that this is true, although it is admitted, that it is difficult to measure the true unemployment. (back)
  6. This can be checked in various sources, for instance p.118 in A Dutch miracle, or p.67 in Inspelen op Europa. At the time the execution of the sickness policy is done by the civil society. Apparently this is not always a guarantee for good performances. According to the public choice theory the groups primarily defend their own interest, and they subordinate the general interest to it. The trade union movement and the associations of entrepreneurs simply shift their costs to society. Furthermore, this abuse reveals a dim picture of the professional morals of the then medical examiners. And finally, politics was evidently quite late in intervening in the abuse, which already escalated around 1975! See p.114 in Het polderwonder (2002, Uitgeverij Contact) by F. de Kam and R.A. ter Hart. Therefore, on p.376 in Inspelen op Europa Balkenende rightly reproaches politics, that it has in this respect neglected its supervisory function.
    The book Inspelen op Europa is a volume of essays, written by a collective of experts. Your columnist bought it many years ago at the Utrecht library, when it sold the antiquarian books in its archive. The library has changed in nature. Nowadays it would probably not even buy Inspelen op Europa because of its scientific origin. (back)
  7. This explanation can be found on p.28-29 in A Dutch miracle. Between 1982 and 1995 the Dutch labour productivity rose with yearly 2.6%, whereas for the total European Union it was 3.8%. The relative growth of the service sectors will indeed be the main cause. But your columnist can imagine, that the wage moderation also plays a role. When this is included in the product price, then apparently the workers have added less value. Conversely, high wages would stimulate computerization, and therefore the labour productivity. (back)
  8. The earlier columns in the Gazette have paid much attention to this phenomenon, that the economic growth path can be optimized by means of a suitable choice of the investment level. Especially the Leninist economists have studied the optimal policy choice for the rate of accumulation. In the capitalist market economy the rate of accumulation is less relevant, because there the central plan is absent. At the time the jobless growth was a western problem. So, for the sake of the global employment the moving of the industry to low-wage states can be desirable, because there a more labour-intensive production technique can be applied. In practice the moving of production is evidently stimulated by the market forces, and not by the global solidarity of the western states. (back)
  9. Your columnist may be wrong, but the data suggest that the GFCF also includes the investments by the state, or at least a part of it. The contribution of the state does not compensate the trend in the private sector. Between 1979 and 1989 the investments by the Dutch state decrease with 0.9% of the GDP. A comparable trend is observable for Belgium, (West-)Germany, and the United Kingdom. However, during the same period the income transfers (redistribution) in the Netherlands still increase, with 0.8%, whereas they decrease in Belgium and Germany. See p.64 in Inspelen op Europa. (back)
  10. The decrease between 1970 and 1980 does look dramatic. In a previous column it has been explained, that this is caused by the then utopian and (in retrospect) bizarre income policy. The Dutch social-democracy, in collaboration with the radicalized trade union movement, tries to impose a radical levelling of incomes. The media are carried away by this attempt, and lose their function of control. After 1977 the centrum-right cabinet Van Agt I aims at a more realistic policy, but it succeeds insufficiently in mobilizing social support. It is a chaotic period, which your columnist did endure. Under the cabinet Lubbers 1 the recovery begins. (back)
  11. The decline of Sweden began after a speculative hausse in the market of housing, which finally was no longer tenable. (back)
  12. Perhaps, here the attention paid to the investment quote is exaggerated. This has personal reasons. Ten years ago, your columnist read the book Konjunkturzyklus und Über-akkumulation (2007, VSA-Verlag) by the radically left-wing economist S. Krüger, which is written in a difficult marxist jargon. A year later the book Zukunft des Finanzmarkt-Kapitalismus (2006, VSA-Verlag) by the radically left-wing economist J. Bischoff followed, which has the same message as Krüger, but is more accessible. Bischoff concludes, just like Krüger, that the investment quote decreases in the western states (p.39 in his book; see in Krüger p.118-120, 126). On p.41, 59 and 113 Bischoff complains, that the falling investments hurt the innovations (development of products and processes). The present-day investors would attach insufficient weight to the long term (p.113). The enterprises must adapt to them. They are no longer credit-takers, but nett savers (p.41). The analysis of Bischoff refers to the Marxist-Leninist tradition, and regularly the works of Marx are cited. According to Marx the profit rate would suffer from a falling tendency. There would be over-accumulation of capital (p.54: "eine Konstellation, wo anlagesuchendes Kapital im gesellschaftlichen Reproduktionsprozess bereits fungierendes Kapital verdrängen muss"). Ulianov (alias Lenin) supposed, that the enterprises would restore the profit rate by forming monopolies, and by taking over certain activities of the state (privatizations). In America this standpoint has been defended in among others Monopoly capital (1966, Penguin Books Ltd) by P.A. Baran and P.M. Sweezy. On p.180 Bischoff writes: "Die Öffnung von Bereichen, die bislang der öffentlichen Versorgung vorbehalten waren, ist ein attraktiver Ausweg aus dieser Lage" [EB: of falling profits]. The "capitalists" use "eine Politik der Aneignung öffentlicher Bereiche und Güter" (p.216). Now Bischoff supposes, that the present-day "capitalists" want to restore the profit rate by means of an expansion of the financial markets. He believes, that these markets are speculative to such an extent, that they become a danger for the social stability (p.45 and 134). Besides, the wage sum would be reduced (p.183): "In Prinzip betreiben die politischen Klassen eine Absenkung der Lohn- und Lohnnebenkosten". The increasing work pressure would lead to a "negativer Individualismus" (p.97). Bischoff demands that the enterprises again invest more in Europe. where he accepts a lower profit rate. He wants to return to Keynesianism, albeit in combination with a basis democracy. This is perhaps most easily done by means of increasing public investments and services (p.66). "Eine Politik der Sozialisierung der Investitionen wäre ein Ansatz für eine schrittweise Transformation"(p.130). The loyal reader may remember, that in the Netherlands J. den Uyl has advocated this course, even in 1986, when the supply side policy had already been successful. In 2008 your columnist was impressed by the book of Bischoff. The style of propaganda, mixed with the cynicism and sarcasm of Marx, is truly stunning. But now it is mainly apparent, that Bischoff supplies insufficient actual proof for his statements and conclusions. Just one example: it does not occur to him, that the financial markets can make the economy more stable, because they offer a wide platform for arbitrage. And he ignores, that the move of investments to abroad has a positive global effect. It is unclear why private investments in the public sector would be wrong, like he suggests. All in all, your columnist must (from his own experience) urgently dissuade from beginning a political emancipation by reading extremist professional literature. And perhaps the reader may now understand, that the Gazette is not very eager to analyze the work of a rebellious author like Piketty. (back)