Netherlands used “textbook policies,” broad public support to sustain growth, create jobs

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The Netherlands’ success in creating jobs and sustaining vibrant economic growth has attracted much attention. Its strong performance throughout the 1990s represents a sharp turnaround from the deep recession and high unemployment that marked the early 1980s. It also contrasts strikingly with the tepid growth and stubbornly high unemployment that have characterized much of continental Europe over the same period. What went right, and can this recipe for success be repeated elsewhere? IMF Occasional Paper No. 181, The Netherlands: Transforming a Market Economy, and the IMF’s most recent Article IV consultation with the country address these issues. C. Maxwell Watson—a Senior Advisor in the IMF’s European I Department and coauthor of the Occasional Paper— and Robert Ford—the Division Chief responsible for the most recent IMF staff report on the Netherlands—discuss the “Dutch miracle” and what lies ahead for that country.

What were the key elements in the transformation of the Dutch economy?

WATSON: For the most part, the Netherlands adopted textbook policies. Over the past fifteen or more years, the authorities reduced their fiscal deficit sharply; contained inflation through the use of a clear and transparent anchor for monetary policy—an exchange rate pegged to the deutsche mark; reduced the burden of taxes and social security contributions on labor; and lowered the real level of some social benefits, the minimum wage, and, especially, the youth minimum wage. The authorities had very clear-cut macroeconomic policies and pursued a number of key structural reforms. Also, they maintained a very effective dialogue with the social partners. Labor unions had already come to view high real wages as part of the problem of structural unemployment. The gains they saw from the government’s broad strategy— namely, in employment and in lower taxes on their members—convinced them to buy into a policy of wage moderation. Taken together, all these elements created an environment in which businesses felt comfortable investing in the future.

Both the Occasional Paper and the recent IMF Executive Board discussion cite the Netherlands’ success in creating a “virtuous circle.” How did this come about?

WATSON: In general terms, synergy is created when strong macroeconomic policies are properly underpinned with good structural reforms and when broad public support enables these reforms to be sustained. This type of complementarity is at the forefront of our policy concerns at the IMF.

But the Netherlands achieved a virtuous circle in more specific ways also. Its reforms were carefully crafted and mutually reinforcing. Progress with social benefits reforms helped restrain public spending, and thus reduce the budget deficit, and also allowed some reduction in the tax burden. In addition, cutting taxes and reforming benefits served to foster and sustain a policy of wage moderation. And wage moderation and a real reduction in minimum wages, especially for youths, over time helped strengthen the demand for labor and bolster...