The Netherlands : Transforming a Market Economy

International Monetary Fund

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1999
• ISBN:
  9781557758040

NONE

Contents

Preface

I Overview

C. Maxwell Watson

The Reform Package

A Model for Others—Or a Unique Experience?

An Agenda for the Future

II Crisis and Recovery

Bas B. Bakker

Crisis of the Early 1980s

Recovery After 1982

The Current Account

III Policy Reforms and Employment Creation

Bas. B. Bakker and loannis Halikias

Monetary Policy

Fiscal Policy

Changes in the Labor Market and Reforms of the Social Security System

Wage Moderation

Why Did Employment Grow So Fast?

Wage Differentiation and Plight of the Unskilled

Changing Enterprise Behavior and the External Current Account

Interlinkage of Structural Reforms and Policy Lessons

IV Managing Financial Sector Change

Jan Kees Martijn

Recent Trends

Consolidation and Internationalization

Financial Sector Competition

Challenges for Financial Supervision

V Cyclical Tensions and the Challenge of EMU

Jan Kees Martijn

Key Issues

The Booming Economy of the Mid-1990s

Experience with the Deutsche Mark Peg

The Challenge of EMU

Current and Future Policy Issues

Appendix

I Determinants of Wage Costs

Bas B. Bakker

II Wage Cost Growth and Employment Growth

Bas B. Bakker

III Has There Been a Break in Enterprise Behavior?

Bos B. Bakker

References

Boxes

II 2.1. Assessing the Participation and Employment Rates

III 3.1. Demographic Shift and Public Finances

IV 4.1. A Profile of the Financial Sector

4.2. The Committee on Corporate Governance

4.3. Financial Sector Supervision

V 5.1. Was the House Price Increase Excessive?

5.2. Strains on the Dutch-German Exchange Rate Peg

5.3. Product Market Reforms

Tables

II 2.1. GDP, Employment, and Productivity

2.2. Average Hours Worked Per Person in Dependent Employment

2.3. Youth Employment and Unemployment Rates, 1997

III 3.1. Public Finances

3.2. Ratio of Benefit Recipients to Employment

3.3. Average Wedge on Labor Income, 1996

3.4. Highest Tax Rates, 1998

3.5. Youth Minimum Wages

3.6. Employment by Education Category

3.7. Balance of Payments

IV 4.1. Supply and Demand in the Capital Market

4.2. Banking Sector Characteristics

4.3. Bank Earnings and Costs, 1990–94

4.4. Average Interest Margin on Retail Products, September 1997

V 5.1. Changes in the Guilder-Deutsche Mark Central Rate, 1970–98

5.2. Selected Dutch and German Economic Indicators

5.3. Correlation Coefficients for Growth Between EU Member States

5.4. Real Exchange Rate Variability Vis-à-Vis Germany

5.5. Sectoral Composition of GDP in the Netherlands and Germany

5.6. Net Export Position by Sector for the Netherlands and Germany

5.7. Output Gap and Monetary Conditions

Appendix

III A1. Regression Results for Corporate Investment

A2. Regression Results for Corporate Saving

A3. Regression Results for Corporate Saving Surplus

Figures

II 2.1. Housing Market Developments

2.2. Employment Indicators

2.3. Fiscal Policy

2.4. Exchange and Interest Rate Developments

2.5. International Comparisons: GDP Per Capita

2.6. Volume of Value Added in Exposed and Sheltered Sectors

2.7. Labor Productivity

2.8. Labor Market Indicators

2.9. Employment

2.10. Labor Market Indicators

2.11. Alternative Indicators of Unemployment

III 3.1. Exchange and Interest Rate Developments

3.2. External Indicators

3.3. Fiscal Policy

3.4. Gross Wages

3.5. Replacement Rates

3.6. Gross and Net Wages

3.7. Average Wedge Private Sector Workers

3.8. Real Wage Costs

3.9. Employment: High Skilled and Low Skilled

3.10. Real Wages: High-Skilled and Low-Skilled Workers

3.11. Current Account and Its Components

3.12. Real Effective Exchange Rate and Labor Income Share

3.13. Domestic Demand and Its Components

3.14. National Saving Surplus and Its Components

3.15. Saving Surpluses of the Various Sectors

3.16. Corporate Investment and Real GDP Growth

3.17. Export Market Growth and GDP Growth

3.18. Capital Income Share and Corporate Saving

3.19. Exchange Rate Indicators

V 5.1. Unemployment Rate

5.2. Housing Prices and Mortgage Lending

5.3. Share Price Indices

5.4. Interest Rate Differential

5.5. Ratios of Dutch to Western German Inflation and Exchange Rates

5.6. Correlations of Demand and Supply Disturbances for EU Countries, 1963–97

5.7. Output Gap and Monetary Conditions

The following symbols have been used throughout this paper:

… to indicate that data are not available;

n.a. to indicate not applicable;

— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

– between years or months (e.g., 1994–95 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

/ between years (e.g., 1994/95) to indicate a crop or fiscal (financial) year.

“Billion” means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.

Crisis of the Early 1980s

In the late 1970s and early 1980s the economic situation in the Netherlands deteriorated dramatically, leaving the economy, by 1982, in a state of crisis. In 1982, real GDP had declined for the second year in succession, with GDP per capita falling below the level of 1978. The profitability of firms was close to zero: the capital income share in value added in 1982 was less than 5 percent—leaving no profits after interest payments. Registered unemployment had risen sharply—from 3½ percent in 1979 to 8½ percent in 1982. Also, the fiscal deficit was increasing rapidly, reaching 9½ percent of GDP on a broad definition including on-lending (6½ percent on a Maastricht definition) in 1982.

From Slowdown to Recession

During the period 1970–82, the growth rates of GDP and GDP per capita were well below that of other European economies, and the gap increased progressively. GDP per capita rose 7 percent less than in Germany and 15 percentage points less than in Belgium and France. The underperformance was especially pronounced from 1979 onward.

Wage developments were an important cause of the weak performance.¹ In the 1960s, when the economy overheated, wage growth accelerated. With wages indexed to prices, the large terms of trade deterioration in the nonenergy economy in 1974 and 1979 did not lead to any compensating decline in real wages: profits instead suffered. In addition, rapid increases in taxes and social security contributions augmented wage pressures; the brunt of the increase was, again, borne by profits. Finally, the replacement ratio increased significantly, reducing the financial burden of being without a job, thereby adding to wage pressures.

By the early 1980s the share of labor in firms’ value added had reached unprecedented levels; at 95 percent, it was 12 points higher than a decade earlier.² The income share of capital declined from 17 percent in 1970 to less than 6 percent in 1980. The profit share declined even more sharply as firms, which had increased their indebtedness in the 1970s, faced high interest rates. By the early 1980s, the enterprise sector had virtually ceased to make profits. Thus, during this period of rapid wage growth, profitability declined sharply, with negative effects on the overall level of investment: during the 1970–82 period private investment was essentially flat. Wage increases did stimulate consumption, but from the mid-1970s onward this was mostly reflected in a deteriorating current account, rather than stronger output growth.

On top of the wage predicament lay the impact of developments in international energy prices, which gained particular attention in accounts of the so-called “Dutch disease.” With higher energy prices, the natural gas revenues of the government rose from under 1 percent of GDP in 1973 to 5 percent in 1981; the additional revenues financed higher transfers to households. They likely also exerted upward pressure on the exchange rate, which, without these windfalls, would probably have adjusted earlier. However, the overall increase in public spending was significantly greater than the counterpart of the additional energy receipts; and the crisis that triggered economic reform in the Netherlands in the early 1980s preceded, by several years, the decline of world energy prices in 1986.³

A strong cycle in the housing market initially masked the weakening of economic performance after 1975 (Figure 2.1). Several factors appear to have caused the sharp increase in house prices in 1975–78. With very low, and at times negative, real long-term interest rates, mortgage borrowing was very attractive—and interest payments were fully deductible, including in higher tax brackets. Moreover, high consumer price inflation led households to use real estate as a hedge. The rapid relative increase in house price...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Preface
• I Overview
• II Crisis and Recovery
• IV Managing Financial Sector Change
• V Cyclical Tensions and the Challenge of EMU
• Appendix
• References
• Boxes
• Footnotes