The Netherlands is the world’s sixteenth largest economy due to its early industrialization, location, culture, and specialized exports (World Bank, 2008). The country has overcome its limited surface area of 41,526 square kilometers and minimal natural resources – with the exception of natural gas deposits – through focusing on exporting ideas, technology, acting as the middle man in international distribution, and continually pushing for more unity within its partners in the European Union (Ministry of Economic Affairs, 2008).
Since World War II, the country’s government has been a contributing part of the long term success of the economy through monitoring business interactions, stimulating the economy, stabilizing inflation relative to economic growth, and social welfare programs (The Economist, 2007). Because of this continued government intervention, the Dutch economy is currently ranked 76.8 percent free making it the world’s thirteenth most free economy (The Heritage Foundation and The Wall Street Journal, 2008). However, starting in the 1980s, and continued through to today, the Dutch government has been working to liberalize the economy (Colby, 2008).
This paper will discuss the Dutch government’s role in the economy as well as the historical role it has played in the country’s political economy after World War II. It will analyze how the Netherlands has managed to secure its place as the distribution hub for imports to Western Europe, and despite the country’s small size has become a globalized, economic power. The paper will conclude with discussing the future of the Dutch government’s role in the economy.
World War II
As World War II approached, the Netherlands attempted to retain their neutrality, as they had done in World War I, which resulted in the nation coming out untarnished (Dutch Ministry of Foreign Affairs). Queen Wilhelmina made arrangements with Hitler, prior to the war not to invade her country (Spencer Tucker, Priscilla Mary Roberts, 2005). The Dutch remained confident in this agreement, but in 1935 began arming their military for defensive purposes. The Dutch also maintained their traditional defensive plans which were based on pre-modern warfare; such as “Fortress Holland” which consisted of destroying dikes and dams to create barriers, and did not account for modern weaponry (The Greb Foundation , 2008).
In May 1940 Hitler began his invasion of the country, and claimed victory within five days (Woolf, 1999). At this time the government went into exile in England working to rally Dutch support and maintain morale within their home country (Ganse, 2007). The Netherlands remained occupied and civilly administered by the Nazis throughout the war without major damage to their infrastructure. Hitler ordered occupying officials to work to link the German and Dutch economies together, because the Dutch were considered part of the Arian race. Nazis ordered the country to be put to full use to support the war effort; skilled workers and food production capabilities were exploited throughout the occupation (Spencer Tucker, Priscilla Mary Roberts, 2005). Nearing the war’s end, as allied powers retook the country, the Nazis retaliated against the Dutch reclamation by attempting to destroy much of the country’s infrastructure. This resulted in mass starvation during the winter of 1944 to 1945 leading to it being called “Hunger Winter.” Mass starvation occurred because of transportation breakdowns from strikes ordered by the exiled Dutch government to assist allied powers advancements, as well as the destruction of dams, dikes, and bridges to defend against the oncoming Allie troops by the Germans. Although the Netherlands may have trekked through German occupation, by the end of World War II, it was considered to be one of the most damaged European nations (Anderson, 1995).
Reconstruction (1945 – 1950)
The Netherlands were left with the war torn lands plundered by the Nazis, who destroyed between 27 and 40 percent of the total capital stock in the country upon their retreat. After Nazi occupation, in 1945 the economy was left running at 27 percent of the pre-war 1938 levels with 60 percent of the transportation system destroyed and up to 15 billion guilders in total damages.
The Dutch government returned to the Netherlands from its exile in London in 1945. The government, while in London, had created plans which would speed the country’s challenging industrial and economic reconstruction. Queen Wilhelmina and her government already had been working on plans to make the government more democratic than it had previously been (Enyclopedia Britannica, 2008). The government established rations of food and textiles which helped equally distribute goods throughout the country, and created resources to be used in reconstruction (Jonge, 1952).The government established social programs to aid the recovering population, and encouraged rapid industrialization to rebuild the country’s infrastructure using grants, tax breaks, and national business strategies. Much of the money used to assist the country came from the United State’s Marshall Plan.
The Marshall Plan was not initially understood by the Dutch. Thus, the government hired artists to create cartoons that would help them open up to the plan that would rebuild much of the country. These cartoons, bordering on advertisements, helped to reach people and eventually over 2.5 million similar to these cartoons were printed (Library of Congress, 2005):
-These cartoons are drawn by Jo Spier, a Dutch-Jew who was imprisoned by Nazis and released following the end of the war-
Retrieved from: (Library of Congress, 2005) (Het Marshall-plan en u).
In 1948 the first shipments of supplies arrived in the Netherlands, followed by another shipment which brought equipment to assist in reconstruction. The Netherlands was able to secure over one billion dollars, spanning over a four year period for its reconstruction from the Marshall Plan (Statistics & Reports Division Agency for International Development, 1975). The money the Netherlands received was largely put towards resolving the most vital troubles: stabilizing inflation, housing programs, land reclamation, and relieving the Dutch population of rations; which were suspended in 1948.
Stabilizing rampant inflation, caused by the Germans overproducing the Dutch Guilder to pay off war supplies, was among these top priorities. By the end of the war the Germans quadrupled the amount of Guilders in the market. This hurt the economy tremendously but did help the Netherlands secure a large portion of the financing from the Marshall Plan. This is because to Dollar to Guilder ratio would allow for the most efficient use of the capital received; which was a consideration of what proportion a country would receive.
The Dutch government used the capital received from the Marshall Plan to spend on reconstruction and foreign goods, which they could not otherwise afford with their hyper-inflated domestic currency (U.S. Department of State, 2005). This contrasted the other option of printing money to finance reconstruction, which would have further worsened inflation and slowed recovery in the long run. In total, the Dutch government spent 197 million dollars to achieve monetary stability (Barry Eichengreen and Marc Uzan, 1992). This in turn allowed for the government to take Guilders out of the market to curve inflation back to pre-war levels. The Guilders the government had removed from the market were later reintegrated into the economy as foreign aid was reduced and the economy was built up (Zanden J. L., The Economic History of the Netherlands 1914-1995, 1998).
Housing Crisis and Social programs
The Germans left the Netherlands destroying 95,000 homes and damaging well over six-hundred-thousand more. The national housing shortage remained until 1950 when the government instated subsidized housing construction. By 1952, 88 million dollars from the Marshall plan on constructing houses, by 1953 the government increased housing construction to 65,000 homes per year. (Barry Eichengreen and Marc Uzan, 1992). By 1985 this equaled over five million homes; vastly exceeding the post war needs for housing, and is widely contributed to other housing programs (Encyclopedia of the Nations, 2007).
The Netherlands advanced welfare programs stemmed from post war living conditions which the population was faced with. From this time onward to the late 1980s, the country would continue to develop and expand these programs. The programs would eventually become the leading expenditure for the government, causing a backlash which would result in steady cutbacks that continue today.
Capital from the Marshall plan was partly used for land reclamation (U.S. Department of State, 2007). Much of this reclamation was not conquering new land but restoring it to its previous condition before the war. In total 166 million dollars from the plan was spent on restoring land (Barry Eichengreen and Marc Uzan, 1992).
Conclusion of the Marshall Plan
Overall, the Marshall Plan in the Netherlands was a success. It helped to boost the economy’s recovery by refurbishing the country’s infrastructure. The housing crisis was solved within years of having 95,000 homes destroyed. The financial support into land reclamation and restoration helped the Netherlands gain a competitive advantage in agriculture which would lead the Netherlands to becoming a leader in agricultural production throughout Europe in the 1950s (N. F. R. Crafts, Gianni Toniolo, 1996).
As the Dutch recovery came to a completion, aid from the Marshall Plan was reduced. However, the United States, now nearing a new war against communism and the Soviet Union, created the Mutual Defense Assistance Act which supplied the Netherlands with capital and military supplies (Koninklijke Bibliotheek). The continued incoming capital to the country could only be used for military purposes, which came to further benefit Dutch steel, manufacturing, and ship building industries (TRUMAN, 1952).
Independence of the East Indies
The Netherlands was not only faced with rebuilding itself and restarting the former economy; but creating a new economy without the support of the East Indies colonies which had helped fuel Dutch economic prominence since the 1800s (Heroepoetri, 2003). The colonies consisted of 40% of all Dutch investment abroad, and were a steady source of income from investment, as well as contributed up to 14 percent to the Dutch National income. The East Indies provided raw materials for the Netherlands to manufacture and export. After the Netherlands was in occupation by the Germans it was more important for the government in exile to remain in control of these colonies for resources such as oil, rubber, and sugar to aid the Nazi resistance. In 1942, Japan invaded the colonies and cut off the stream of supplies to the allies.
Following the 1942 to 1945 Japanese occupation of the Netherlands East Indies colonies the PNI, Partai Nasional Indonesia, declared the creation of the Republic of Indonesia and free from Dutch rule. The Netherlands government, unable to comprehend the ruined motherland economy without the help of its East Indies colonies, and despite Queen Wilhelmina’s 1942 radio broadcast to organize a comity assisting in Indonesia’s independence after the war immediately dispatched the military to the former colony only to have underestimated the PNI forces in the newly formed country. Another reclamation campaign followed, however the re-colonization of the East Indies was not supported internationally. Despite adamant Dutch expectations to reclaim the East Indies; Indonesia was granted independence in 1949, and New Guinea in 1964 (Dutch Ministry of Foreign Affairs).
The loss of the Dutch East Indies affected the Netherlands in several ways. The companies, railroads, and plantations that had been built with Dutch FDI were nationalized and mutual trade ceased (Vanderheide Publishing Co. Ltd., 1995). Royal Dutch Shell was excluded from being nationalized due to Indonesia’s need for FDI to explore and exploit its oil (Funding Universe). Some economists have predicted that the Dutch economy would not have expanded to the extent it did in the postwar era without the loss of the East Indies prompting the Netherlands to modernize and pursue other business interests. The independence of the East Indies ended the Netherlands as a world navel power and caused the country to lose a portion of its versatility, which would later be restored as the economy globalized (Zanden J. L., 1998).
Socio-Political divides and State Owned Enterprises
Prior to World War II the Netherlands was engulfed in a pillared society between Catholics, Liberals, Protestants, and socialists. Each pillar was associated with solely its section of society and interaction was looked down upon (Koch, 2006). During the war, the pillars mixed together to some extent because of the German occupation leading people to be “Dutch” before anything else. Although Queen Wilhelmina desired to rid the country of pillarastian, after the war the pillars remained (Dutch Ministry of Foreign Affairs).
Groups continued cooperation during reconstruction of the country which led to permanent and official collaborations between individual pillars, which created a massive post war Socialist-Catholic party. This party was a societal response to the many citizens who needed assistance and believed a socialist government would be the answer. In reality, this socialist party was not truly socialist, but behaved as a mixed economy with strong safety nets (Frits Van Oostrom, Committee for the Development of the Dut, Hubert Slings, 2007).
The Socialist-Catholic party, which was in power from 1946 to 1948, is responsible for many of the Dutch state owned corporations after the war; although the government had long age begun running state owned enterprises , joint ventures, and granting government subsidies. The nationalization of private banks was one of the first state owned ventures. This was a mixed nationalization being that the government took a 51 percent ownership of the banks, this was followed by the nationalization of the Central bank in 1948. The following year the government continued its efforts to industrialize the economy. The firms Hoogovens and Nederland Soda both were expanded further into the chemical industry and focused on low consumer costs using petroleum rather than coal which had been used before the war (Toninelli, 2000). These state enterprises undoubtedly helped the post war economy through reconstruction by maintaining the low cost comparative advantage, attracting foreign interest in Dutch products.
The Dutch government allowed their corporations to run without interference from the government to encourage a free market, while the corporations were taxed to encourage a fair market. This encouraged private Foreign Direct Investment into the Netherlands industrial economy due to the efficient infrastructure the county offered multinational corporations (Dutch State Mines, 2008). The Netherlands promoted policies supporting exportation and economic integration which led to vast amounts of the Netherlands products to be exported; strengthening the countries stance as a global distributer through expanding their seaports and streamlining business processes (Netherlands Bureau for Economic Policy Analysis).
In the 1960s the pillars gradually began to decentralize and coagulate. This is largely due to collapse of secularized worship within the majority of Dutch society, and 42 percent of society having no religion (Herten, 2008). There are still parties based on religion, however they have largely lost power in the national government. Parties that remain in power are now focused on economic, environmental, and political agendas (Scheepers, 2005).
Reconstruction of Industry
Where before World War II the economy had been largely an equal mix of agriculture and industry; investment into the Netherlands after the war pushed the country further towards industrialization. By 1950, 38 percent of the population was working in manufacturing or some form of industry, and 13.5 percent working in agriculture compared to 20.2 percent in 1938 (Bart van Ark and Herman De Jong, 1996). Foreign investment into the country tripled by 1950, and increasing exports caused the GDP to rise at a rate of 20 percent per year (N. F. R. Crafts, Gianni Toniolo, 1996). The Netherlands reconstruction was hastened by a series of economic and political treaties that simplified international trading. These treaties did not only gain a larger market for the small country, but led to it becoming a distribution hub of Europe.
International Trade and Manufacturing
The Netherlands increase in GDP was largely attributed to investment into shipping which increased 6.5 times by 1950.The prominence of ship building and metal working in the Netherlands after the war can partly be contributed to the occupying Nazis (Zanden J. L., The Economic History of the Netherlands 1914-1995, 1998). The Germans had been built up these industries to assist in their war effort and neglected to destroy them during their coming defeat. This gave the county a competitive advantage in these sectors as well as cut down their total capital losses from the war by up to 14 percent (N. F. R. Crafts, Gianni Toniolo, 1996). Germany in fact became one of the most important export markets for the Netherlands creating a one-billion dollar trade deficit by 1949; the Dutch became the third biggest exporter in Western Europe (Milward, 1984).
Much of these exports were chemical and electronic goods. The Netherlands prior to World War II was involved in manufacturing, however, it was not until after the war when it became a vital part of the economy, partly due to the independence of the East Indies, which is where much of the empire’s manufacturing took place (Microsoft Encarta Online Encyclopedia, 2008). This one aspect leads some economists to suspect had the East Indies not gained independence the Netherlands, the Dutch economy would not have grown to the extent it did. Manufacturing in the Netherlands vs. The East Indies had lowered shipping costs, and maintained a preferable exchange rate to most other currencies. This maintained lower fixed costs and made the Netherlands a low-price leader and distributer.
Internationally, the Netherlands signed several treaties between 1944 and 1957, which created a free market environment to export goods and services from and import raw materials to manufacture. These treaties have developed to be of vital importance to the country as it begun to rely more heavily on trade, less on manufacturing, and became a service based economy (Dutch Ministry of Foreign Affairs).
The Conclusion of Reconstruction
The post war period set the stage for what makes up the Netherlands today. World War II brought about mass struggle and devastation to the Dutch people, causing the government to react upon their return from exile to create programs assisting the people in starting their postwar lives. The welfare and social programs the Dutch government created to aid post war victims today, on tax payers’ money, instead of money gifted to the country by the Marshall Plan. These programs are considered a model network of social programs by some, but are often a deterrent to multinational corporations as a barrier to invest in the Netherlands economy, because of the higher operating costs from taxes to support the governments’ expenditures.
The Netherlands economy is structured largely by what remained undestroyed of the post war infrastructure. The Netherlands owes that it is the distributer of international goods to Germany’s investment into seaports during Nazi occupation, government economic reconstruction plans, as well as the country being in a key location in Western Europe. The Dutch government after the war invested itself into the private sector, which led to many state owned corporations, many of which continue today. The government’s low cost production plans, subsidies, and wage regulations after the war allowed business income to be reinvested in the economy and guided the country to become a major manufacturer of electronics and chemicals. The government worked progressively to unify Europe for protection and economic success which further pushed it away from its agricultural origins and into the newly evolving global economy.
Golden age (1950 – 1973)
Following the majority of reconstruction in the Netherlands, the country entered a period of economic expansion that began in 1950 and continued until the early seventies ( Naastepad, Kleinknecht, 2004). This period is known as the “Golden Age” of the Dutch economy; not to be confused with the seventeenth century Dutch Golden Age of economic expansion (Dutch Ministry of Foreign Affairs). It is marked by Western Europe, as well as the Netherlands, completing reconstruction and focusing on constructing their long term economies. The Dutch economy grew between four and five percent per year, the labor force doubled as well as capital stock; largely within the manufacturing sector whose labor productivity increased by six percent (N. F. R. Crafts, Gianni Toniolo, 1996).
International Explanation for Economic Expansion
Continued growth of the Dutch economy is largely attributed to the liberalization of trade which took place following World War II with the creation of the General Agreement on Tariffs and Trade (GATT) in 1948. The Torquay round in 1951 resulted in a 25 percent drop in tariffs between the then 38 GATT member countries (World Trade Organization). Manufactured quantitative tariffs were lowered particularly within the countries of the Organization for European Economic Cooperation (IRWIN, 1995).
Economic treaties were an extremely important part of the globalization and reconstruction of industry in the Netherlands. They assured that the country would have a large market to export to, as well as maintained low tariffs and trade blocks between trading partners. Economic treaties boosted the Netherlands as a trading hub because of its prime location within many of the alliances formed within Europe (De Canon Van Nederland).
The Benelux Treaty
The Benelux Treaty was signed in 1944 in London by the exiled governments of the Netherlands, Belgium, and Luxembourg. The treaty was created for a number of reasons. It worked to remove barriers, and encourage freedom of movement of goods, services and people between its members. It was created as an international cooperation to assure that the three, smaller, European countries would remain key parts in European economic market, and works politically within Europe for members to gain a greater foothold in continental policy making (Benelux).
The North Atlantic Treaty Organization
The North Atlantic Treaty Organization was created in 1949 by twelve members (Research Machines plc, 2008). Unlike many of the other treaties which the Netherlands signed, this treaty is military based. Its purpose is to defend against threats against Western freedoms and formed an alliance between all members to protect one another from attack. One of the key points that brought about its creation is the rise of communism and the ever looming threat of becoming a satellite state of the Soviet Union (Microsoft Encarta Online Encyclopedia, 2008).
The Treaty of Paris
The Treaty of Paris signed in 1951 by France, Germany, Italy, The Netherlands, Belgium, and Luxembourg created the European Coal and Steel Community (Encyclopædia Britannica, 2008). The treaty’s purpose was to free movement of coal and steel within its members. A main idea of this treaty was that allowing these resources to be allocated to where they needed to be it would encourage trade and European economic prosperity. For the Netherlands, this meant that the raw materials for ship building, land reclamation, and manufacturing could be readily accessible at free market prices without price fixing and tariffs (European Communities, 2005).
The Treaty of Rome
The Treaty of Rome signed in 1957 by all of the members of the European Coal and Steel Community created the European Economic Community. This treaty brought together a European government comprised of delegates from the member countries (Ocaña, 2003). The government’s goal was to encourage economic and political unity among the six countries. The European Economic Community’s main points were to create a free market, liberalize agriculture, and share atomic energy amongst themselves. The European Economic Community is the predecessor to the European Union (The Institute for the Study of Civil Society, 2007).
Conclusion of Treaties
These treaties not only gave the Netherlands, as well as every other member country, an equal opportunity to gain economic prosperity for their population, but also protected the individual members from outside threats. Trading freely between European countries helped to stabilize Europe politically and helped to prevent war in Western Europe. However, these treaties left out Eastern Europe because the two ruling philosophies, capitalism and communism, were not able to see eye to eye. Their inability to cooperate and come to an understanding would lead to a divide between the West and East, which would only continue to grow and lead to an instable relationship.
Domestic Explanation for Economic Expansion
The domestic trigger that helped to set off the two decade growth period was the Netherlands comparative advantage in postwar production cost compared to other countries. The Netherlands manufactured chemicals from the early 1950s evolving to manufacturing products derived from oil nearing the 1970s. Domestically, agriculture grew rapidly creating surpluses of food which were exported. The multi-focused domestic economy allowed the Netherlands to produce products efficiently with domestic raw materials.
Domestic Production Comparative Advantage
The Guilder experienced devaluation between 1944 and 1949 which made it more attractive to foreign trade as well as postwar decreases in prices. To keep relative production costs low, and encourage foreign companies to continue investing in the Netherlands; the country established the Social and Economic Council to control wage increases in 1950 (N. F. R. Crafts, Gianni Toniolo, 1996). The council was comprised of government officials and employee nominated trade union representatives. They established a National Wage Policy that was agreed upon by both the union officials and the government. Income was adjusted to the cost of living increase for that year based on price increases, inflation, and the local cost of living within one of the five districts of the country the government created to maintain equal national cost of living relative to the other districts (Roberts, 1957). The government was cautious to raise wages and purposely raised wages only as a percentage of the cost of living increase, despite pressure from unions. Cooperation between the government and unions helped to build up inward foreign investment to Holland, as well as allowed Dutch companies to outwardly invest increasing the stability further globalizing the economy (Wijffels, 2001). By 1960 postwar salaries were equal to pre-war salaries and the country had full employment. Tensions between unions and the government remained high, as well as increasing taxes caused the system to collapse in 1963; liberalizing wages (Donders, Graafland, 1998). The collapse of wage limitations lead to a “wage explosion” period that increased Dutch wages to that of the rest of Europe; emphasis has been put on this as one of the variables in the economic slowdown of the seventies (Zanden J. L., The Economic History of the Netherlands 1914-1995, 1998). However, by 1963, the Netherlands infrastructure had been rebuilt as a shipping and manufacturing hub, and was no longer reliant on the low cost production techniques that were used to attract foreign investment. The Dutch shipping and manufacturing industries were able to stay dynamic using cultural advantages in efficiency and services.
Expansion of Agriculture
The expansion of agriculture occurred because of government policies to create large-scale farms through merging smaller prewar family farms. The merging of smaller farms took place, because the industrialization of the economy opened up jobs in factories prompting less labor and larger farms. The government began to subsidize farmers; as former farmers continued to migrate to industry. Government subsidies created capital that farmers contributed to mechanized equipment thus raising productivity in agriculture. Farms gained capital from investors and bank loans to further mechanize cutting down on costs and increasing in productivity. The Netherlands began exporting more food than it was domestically consuming; this was assisted by the European Common Agriculture Policy which most likely saved the profitability of farms in the Netherlands from a falling rate of profit (Zanden J. L., The Economic History of the Netherlands, 1914-1995 , 1998).
Conclusion to the Golden Age
Throughout the twenty-three years of economic expansion, the country maintained full employment. The Netherlands maintained its growth because of its prime shipping location, which was able to grow alongside the increasing global shipping trends. It can be said that the spark that ignited the Golden Age were the economic treaties the country signed alongside their low cost advantage. These treaties assured a market to export to and tariff free imports to manufacture with. Tensions were caused within some of the treaty members because of the constant productivity of the Netherlands; they were one of the only countries in Europe to have a substantial export surplus (Zanden J. L., The Economic History of the Netherlands, 1914-1995 , 1998).
The Golden Age brought about several wage explosions that made Dutch salaries above the average European salaries after the fall of wage controls. As commodity and labor prices raised, these treaties put the Netherlands in a place to develop in the late twentieth century to a service oriented economy focused on international distribution. This relatively easy switch to a service based economy took place after an economic slowdown starting in 1973 because of a new economic disease; the Dutch Disease.
Economic Slowdown (1973)
Following the over twenty year period of economic growth the bubble burst. From 1973-1985 the Dutch GDP growth rate fell to 2 percent per year. The economic slowdown was not restricted to the Netherlands but engulfed most of Europe, which made it all the more difficult to recover from since most trading partners were also in recessions. The Dutch economy retained a slightly higher growth rate compared to other European counterparts until the depression in the 1980s caused the economy to fall behind other European countries and grow at a rate of 1.22 percent per year throughout the 1980s (Zanden J. L., The Economic History of the Netherlands, 1914-1995, 1998).
There are several reasons put forth to explain the economic slowdown. Among them is an inability to maintain the high growth rate that had preceded the economic slowdown causing the growth rate to rapidly fall once it had peaked. An international factor is the collapse of the Bretton Woods system, which caused international trading difficulties for the trade-reliant country. Difficulties in international trade resulted in many jobs moving to the newly formed oil and natural gas sector. This sector resulted in high profits, causing growing salaries, which led to increasing domestic inflation, creating the Dutch Disease (N. F. R. Crafts, Gianni Toniolo, 1996).
Collapes of the Bretton Woods System
The Bretton Woods system created a standard exchange unit for international trade. The USD at the time was attached to gold and reliant on United States gold reserves to back up the value of the dollar as an international trading unit. However, due to the United States government over spending and over printing money, the country’s gold reserves were not able to backup the dollar. This led to two attempts to reform the Bretton Woods system but ultimately to its collapse in 1971.
The collapse affected the Dutch economy by removing a standard monetary unit from trade. This caused the government to adjust monetary policy and readjust the value of the Dutch Guilder. The collapse of the system also caused the Dutch Guilder’s exchange rate to rise. This hurt the Dutch economy because it caused fixed production costs to raise compared to other countries, discouraging production within the Netherlands (Zanden J. L., The Economic History of the Netherlands, 1914-1995, 1998).
The Dutch Disease
The Dutch Disease was caused by the Dutch exploiting oil and natural gas reserves beginning in the 1960s. Oil and natural gas’s demand, as a commodity, was not affected by the high price of the Guilder nor the relatively higher wages in the Netherlands. The rapid growth of the commodity industry siphoned workers from other sectors of the economy because of the high wages being offered by the oil industry. This created a shortage of labor in many industries and ultimately caused the firms to close down or down-size; all while the commodity industry continued to grow and thrive (Silva, 1994). The oil industry grew rapidly due to the ease to extract and export the product, compared with the restrictions of manufacturing and exporting due to a poor trading environment brought on by the collapse of the Bretton Woods system. The shrinking of the majority of the economy caused a recession because the overall economy was shrinking while only the oil industry grew (Canuto, 2007). This was occurring while unemployment was rising because oil companies could not employee the total population that lost their jobs because of other firms downsizing (Gordon). Inflation and cost of living continued to rise because of large amounts of foreign capital entering the economy, creating the illusion of a growing economy. High cost of operation in the Netherlands led to more industries closing, unable to operate in the high cost environment (Wagenaar, 2000).
1985 marked the end of the economic slowdown period for the Netherlands. The government created dynamism through selling state owned enterprises in the early 1980s to privatize the economy, create competition, and erase government debt. The revenue brought in renewed the availability of public finance to private firms, helping to fuel economic growth. Economic and labor policies aimed at updating capital stock to replace equipment that existed from WWII. Union leaders and government officials reorganized unions and revised wage restrictions to once again control rising labor costs these new policies focused on long term steady economic growth vs. a cyclical economy comprised booms and recessions.
Welfare programs and benefits were cut or made more difficult to receive in order to cut taxes to the middle economy. The availability of finance and lower taxes to small firms helped the middle sized company to become a larger portion of the Dutch economy; whereas the multinational cooperation had relatively small growths rates. This made the Dutch economy appear to mirror its larger German neighbor with its sizeable economy largely made up of small and mid-sized companies known as the “Mittelstand” (Parnell, 1999). These companies helped Holland’s job creation and long term stability by diversifying the economy from its reliance on a few large co operations.
Internationally the Netherlands recovery was again more rapid than that of Europe’s. The Dutch GDP grew at an annual rate of 2.53 percent, while Europe’s grew at 2.20 percent between 1985 and 1994. The growth of the Dutch GDP in this case is largely contributed to the global economic recovery. Since the Netherlands is a small, shipping and exporting country, capital can to be drawn into and throughout the economy more quickly as larger countries demands rise but are hindered growing at such a fast rate due to distance and location. This also explains how the country was able to rapidly grow its GDP while having a lower investment rate (4.27 percent) than Europe (4.87 percent) because it required less construction of gross infrastructure for transportation and processing due to its physical size.
The revised wage restriction policies helped the long term growth of the economy by holding back wage booms and forcing wages to only increase at a steady rate. Between 1983 and 1993, Dutch wages only rose by 5 percent and were companied by low inflation compared to a 37 percent in Germany. These wages kept exports from Holland in demand throughout Europe and especially to Germany, where the exchange rate between the Deutsche Mark and Dutch Guilder was vital to the Netherlands export industry. However, due to the restrictive growth policies the Dutch government enacted, the country did not go into recession upon Germany’s reunification; proving it to be a viable, moderately cyclical economic system.
The Netherlands today
The Netherlands has developed into a mainly service economy focused on the financial sector and shipping and transportation services. It is widely renowned as one of the world’s most liberal countries as far as social issues are concerned, as well as considered to be one the most governmentally regulated and taxed countries in the world. The economy is extremely diversified beyond its shipping industry, which accounts for about half of the Dutch GDP, involved in agriculture, financial and business services, as well as manufacturing and chemical production. The country is comprised of a balance of multinational corporations and smaller firms, which mainly also work internationally (Dutch Ministry of Foreign Affairs).
The Modern economy
The Dutch economy is reliant upon European economic unification and trade treaties largely because of its small physical size. The economy is made up of many sectors of which no one sector dominates the overall economy. Although the Netherlands has a diverse economy, they have 14 of the Fortune 500 companies, putting the country in eighth place. The one characteristic of the economy that dominates business is the service industry, which comprises 80% of business. The service sector is largely local based, but branches out internationally through banking, insurance, and consulting (Fortune 500, 2007).
Shipping and Trade
The Netherlands today is the distribution center of Europe, and is known as the gateway to Europe for international goods. It contains one of the largest single ports, the port of Rotterdam, as well as one of the largest airports in the in Europe, Schiphol. The fact that this small country has been able to lock down such a large share of the transportation and shipping markets is astonishing being that the country, as small as it is, also has relatively small cities compared to the rest of Europe (Dutch Ministry of Foreign Affairs).
Its most populous city is Amsterdam has 755,269 people and is ranked the twenty-sixth largest city in Europe. Yet, the city has one of Europe’s largest airports, Schiphol, which handles nearly fifty million people a year (over three times the total population of Holland), and 1.5 million tons of cargo (Amsterdam Airport Schiphol Marketing & Accountmanagement Statistics & Intelligence, 2007). The Port of Amsterdam is the fourth largest port in Western Europe, holding 7.4 percent of the market shares. The Port of Amsterdam is a huge contributor to the economy of both the city and the Netherlands, contributing 45 million Euros in 2007, in addition to adding 5.2 billion Euros to the city’s value (Port of Amsterdam Communications Department, 2008).
This however pales in comparison to the Port of Rotterdam which handles over 400 million tons of cargo annually and is one of the most advanced sea port facilities in the world. For over 40 years, this port was the largest in the world until Asian countries began entering international trade as major exporters. The Port of Rotterdam remains the largest port in Europe and the largest outside of Asia (Port of Rotterdam Authority, 2007).
As stated earlier, the Dutch shipping industry has a huge impact on the economy. In 2007, total exports for the Netherlands was 318 billion Euros compared to 285 billion Euros imported, leaving the country with a sizeable, healthy trade surplus. Dutch shipping firms are responsible for transporting two fifths of total European Union transports on water, and the country is the third largest exporter of food in the world. The Netherlands has a total market share of 3.9 percent, ranking it sixth in the international exportation of goods, and a 3.8 percent market share, ranking the country eighth in international service exportation. Over one half of the entire shipping industry is comprised of re-exportation, equating to 140 billion Euros in 2007 (Dutch Ministry of Foreign Affairs).
Financial and Business
The largest sector is the financial and business sector which is 27 percent of the economy (Dutch Ministry of Foreign Affairs). Banking, business, and communication services combined created 166 billion Euros in 2005, and continue to grow as well as branch off into medical development and insurance fields. Dutch insurance and banking services receive over half of their revenue from abroad due to expanding online capabilities available, many of which were developed in the Netherlands.
The financial and business sectors are dominated, as is in most countries, by large, multinational corporations. Financial corporations are a staple part of the economy and are reliant upon the Euro Zone as a tariff free zone to transfer money. The Netherlands is home to a number of the world’s largest financial firms such as ING, ABN-Amro Holding, and Fortis which are all ranked in the top hundred of Forbes 2000. Factors attracting multinational corporations to the Netherlands are because of their Corporation Tax Act, which prevents double taxation internationally (Economist Intelligence Unit, 2008). The Dutch also have a corporate tax rate of 25.5 percent, which is comparatively low with much of Western Europe (Business International, 2007). A bonus for companies doing business in the Netherlands is the creative aspect of the Dutch population. Creative jobs now account for 6.5 percent of employment, involved in advertizing, fashion, product design and innovation (Dutch Ministry of Foreign Affairs).
The second largest sector of the economy is the manufacturing and extractive industries, which encompass 17 percent of the total economy (Dutch Ministry of Foreign Affairs). This sector has recessed since the 1970s because of the rising costs for labor in the Netherlands causing most manufacturing to be at half of the peak levels. Three percent of the sector is from Dutch oil and natural gas deposits, which remain a small, steady source of revenue, however are not considered to be a fundamental piece of the overall GDP. What remains of the manufacturing sector is largely design and development of high-technology product plans for exportation to be produced in a less cost intense location. (Herman Noordman and Bert Minne, 2003).
The public sector ranks as the twelfth largest portion. The government have been making efforts to cut down on its impact through privatization, tax breaks, and cutting back on social programs. However, if one were to include health care, which is public, in that estimate then the public/health care sector jumps to being the second largest portion of the economy at 25 percent (Dutch Ministry of Foreign Affairs).
An important but small portion of the Dutch system is agriculture, and because of Dutch innovation, farms in the Netherlands are among the most efficient in the world (Encyclopædia Britannica, 2008). Although this portion only accounts for two percent of the economy, it is important because the industry provides over six-hundred-thousand jobs, comprises 95 percent of small businesses, and accounts for one-fifth of Dutch exports (Dutch Ministry of Foreign Affairs). This area is important not only because of the amount of jobs it creates domestically, but also because of the diversification, small business opportunities, and wealth distribution benefits it offers.
Unlike many countries in Europe the Netherlands has designed its tax system to encourage entrepreneurship, foreign investment, and companies branching abroad. As stated earlier, the tax system in the Netherlands focuses on allowing for ease of capital movement throughout the European Union to stimulate its banking industry. Although the tax system is about par with global levels of taxation, within the European system the country is considered to have lower taxes specifically designed to facilitate inward investment. The Netherlands has tax treaties with over seventy countries to reduce tax on investment interest, dividends, and royalties. These tax treaties benefit citizens and companies branching off internationally but who are still based within the European Union (Tax Consultants International, 2007).
The Dutch VAT system exempts transportation taxes on goods going through the Netherlands to encourage the continuation of re-exports and the Netherlands as a distribution hub, as well as exempts some banking, medical, and educational services. VAT maintains tax levels standard to that of the European Union for imports such as goods and articles of human consumption (Tax Consultants international, 2007).
The Netherlands personal income tax system is one of the more complex tax systems. A resident’s tax is evaluated by several factors including marital status, children, home and/or car ownership, and income compared to family size. Domestic residents are potently taxed on all income including dividends, foreign and domestic investments, as well as real estate. However, a Dutch national not residing in the Netherlands is not subject to most income and investment taxes. For non-Dutch citizens living in the Netherlands for less than 120 months there is a flat 30 percent income tax rate, this unique flat tax is to encourage foreign skilled labor and entrepreneurs whom may be scarce in the Netherlands to enter the Dutch job market (Welcome to Dutch Taxes).
The Netherlands has what are today considered to be some of the world’s most advanced social programs (Expatax). These programs include four national health insurance plans, four worker insurance plans, and social service plans such as the General Family Allowance Act, and the National Assistance Act, which offers people with no, or little income to receive government money (Encyclopædia Britannica, 2008).
Due to this extensive coverage that all residents are eligible for, the Netherlands is listed as having 51.6 percent fiscal freedom because of the extensive taxes required to maintain the universal welfare programs. Even rated less than the country’s fiscal freedom, is its rating for freedom from the government which is listed at 38.2 percent because government spending is listed at 45.4 percent of the GDP (The Heritage Foundation and The Wall Street Journal, 2008). The Dutch government’s expenditures amounted to 141 billion Euros in 2006, compared to the 2005 government expenditures equaling 132.9 billion Euros. Of which, an estimated 34 billion Euros were allocated to public health and social provisions. The 2006 expenditure on health and social provisions was one billion Euros more than in 2005 due to abolishing compulsory health insurance, however its savings were somewhat offset by the onset of a new health insurance act for children costing 1.9 billion Euros.
The Dutch government is, and has been, working to control their welfare expenses through instating programs for rehabilitation into the work force, and encouraging local welfare programs (European Foundation for the Improvement of Living and Working Conditions, 2007). These new money saving programs have helped decrease expenses, however, the governments overall expenditures in 2006 were 6.2 percent higher than 2005, a 1.2 percent increase in spending compared to that of the 5 percent increase in GDP (Arkesteijn, 2007).
What it is, and What The Dutch Economy will Become
The Dutch economy is a diversified economy that that has grown into being based on international affairs and economic treaties. The economy, although incredibly diverse is reliant upon one thing, its relations with the world around it. As long as these relations are stable there is no reason to suspect that the Dutch economy will lose its place as a destination for international shipping, business, and banking.
The Netherlands global relationships will allow the economy continue to grow and thrive further into the service industry even as Asian countries take command of manufacturing due their ability to offer lower costs. The economy of the Netherlands is in a position, both because of its efforts to become an international economic center and physical location, to prosper from its developing Asian counterpart.
The country has built its ports to be the most advanced and capable in the world, ready and able to take on larger ships and more cargo. The government, along with investment after WWII from the Marshal Plan has helped to develop an infrastructure that links Europe to the Netherlands through cannels, highways, and rail. The government realizes the need for globalization for the country’s success, and has developed favorable, flexible economic policies that encourage continual growth of its trading capabilities. These factors all put the Netherlands in a positive position for a growing future in shipping.
Economic policies have been created for the continuation of funding for social programs, that while may lead to higher taxes, have brought about some of the highest standards of living in the world. High taxes in the Netherlands have been designed with business in mind and have not been a deterrent for service oriented corporations because many of these corporations can be exempt and because of the highly educated and innovative population. The tax exemptions and limitations for banking and global businesses create the country as a haven among the European Union where there are higher taxes.
There is no reason to suspect that with the long term policies and plans set up in the Netherlands that there is any long term threat to the continued growth of the economy. Although the country does potentially face some issues involving global warming and raising ocean levels this innovative society has evolved itself to fit the conditions it is faced with, no matter it be economically, environmentally, or politically. There is no reason to think that the small country will not evolve again.
* The bibliography has been removed and can be obtained from Michael W. Anderson.