©1999 International Monetary Fund
Transforming a Market Economy
C. Maxwell Watson, Bas B. Bakker, Jan Kees Martijn,
C. Maxwell Watson
The striking turnaround in the Netherlands' economic performance over the past decade and a half has attracted widespread attention. Emerging from deep recession and high unemployment in the early 1980s, the economy shifted to a pace of growth more rapid than that in neighboring economies, and posted a rise in employment close to that in the United States. Even adjusted for an increase in part-time work, job creation in the Netherlands has compared favorably with the experience elsewhere in Europe.
This impressive performance was rooted in policy reforms that included a firm monetary anchor, tight control over public expenditure, and reduced intervention in the economy. With notable wage moderation, and broad "ownership," the reforms have been sustained over an extended period, exercising mutually reinforcing effects.
Economic reform in the Netherlands is far from complete--with major challenges remaining in the area, among others, of long-term and low-skill unemployment. Nonetheless, this experience deserves to be studied in order to distill elements that may be relevant to other countries--and indeed to the task of improving further the performance of the Dutch economy.
The Reform Package
In 1982, a worsening economic crisis triggered major changes in policies and wage behavior in the Netherlands. A deep recession was under way, with real GDP declining for the second year in succession, GDP per capita falling below the level of 1978, business firms barely profitable, and registered unemployment reaching 8 1/2 percent--a rise of 5 percentage points in three years. The fiscal deficit, on a broad definition, had risen to 9 1/2 percent of GDP.
In this setting, the authorities and the social partners recognized that, to address the serious macroeconomic and structural problems, a fundamental change in policy approach was needed:
A Model for Others--Or a Unique Experience?
The reforms, as outlined, were orthodox. A credible monetary anchor; expenditure-based fiscal consolidation, allowing cuts in the tax burden as well as the fiscal deficit; demand and supply side reforms in the labor market--on the face of it, they were more of a textbook cure than a "Dutch miracle." What, then, were the ingredients that have proved elusive for many other economies?
First, the interaction of key policies, and their mutually reinforcing impact, emerge as critical:
Second was the consultative style of the authorities and the cooperation of the social partners, which were also critical for effective reform. Consultation was a key feature of the authorities' approach, and the social partners responded in a spirit of cooperation--although consensus proved elusive at times and some measures provoked strikes. Nevertheless, the reforms became broadly owned, which explains how it was possible to sustain them over a long period. Moreover, the clear strategic commitment of the labor unions provided a setting in which firms felt confident to develop medium-term business plans, expanding investment and employment.
Third was the role of fiscal and labor market reforms in sustaining the change in labor market behavior. The government in effect changed the rules of the game in the labor market: it offered income gains through tax cuts under a new fiscal strategy--but it also pressed through measures that provoked strong negative reactions, such as cuts in the real value of social benefits and minimum wages. There was acceptance, overall, because these new rules delivered growth, jobs, and core social protection.
On all these counts, the evidence speaks to a powerful chemistry at work in the design and implementation of the reforms. Chemistry, but no alchemy. The interaction of reforms--for example, the trade-off of tax cuts for wage moderation--reflected careful design. The results were promised up front, as a fruit of cooperation, and by and large they were delivered. Equally, the shift in labor union attitudes displayed a statesmanship that commanded wide respect, but it was not exogenous: it corresponded closely to a shift in economic fundamentals and to announced changes in official policies.
For those who would transpose this approach to other economies, particularly where constraints in the design of social protection systems are similar, the key arguments lie in the fundamental orthodoxy of the reforms, their complementary nature, and the benefits of wide ownership and sustained implementation. By contrast, the most important caveats lie in the uniqueness of certain starting conditions in the Netherlands:
This difference, moreover, has strong relevance to the situation in which the Netherlands now finds itself. In a nutshell, few of the long-term unemployed in the Netherlands have returned to work, and job creation has not benefited the low skilled. In the future, as the population begins to age, it will be crucial to ensure that the share of the inactive in the population is progressively reduced and that approaches to training, labor costs, and benefit design promote higher employment among the low skilled.
An Agenda for the Future
A number of important problems remain to be tackled to further strengthen economic performance in the Netherlands. Continuing fiscal and structural reforms are needed to impart a flexibility to the economy that will allow it to benefit fully from the European Economic and Monetary Union (EMU). At the same time, the levels of labor force participation and employment must be raised further, reducing the number of persons on welfare programs.
To achieve these goals, key reform priorities include the following:
The reform process, in sum, is as yet incomplete, and the advent of EMU calls for efforts to be renewed. Measures are needed that, as in the past, will exercise a mutually reinforcing impact on the functioning of markets and the strength of the public finances--thus extending the impressive performance of growth and employment creation in recent years.