TCS Daily

A Hole in the Dike

By Hans H.J. Labohm - December 30, 2003 12:00 AM

In the never-ending inquiry into the nature of the wealth of nations, economic systems occupy a special place as overarching structures within which the economic process runs its course. During the Cold War attention focused almost exclusively on two diametrically opposite models: the communist central planning system or command economy on the one hand, and the Western free enterprise economy on the other. After the fall of communism and the ensuing demise of the command economy as a viable alternative to the market, the focus of attention shifted to the differences in characteristics and performance of the free market systems in the major world economic regions, especially the US and Europe.

Despite considerable differences among various European countries, it is generally accepted that there is a kind of common denominator, often referred to as the European Rhineland Model. Compared with the American or Anglo-Saxon model, it puts more emphasis on achieving income equality by various means, including progressive tax systems, relatively generous social security benefits, tripartite dialogue among the government, employers' federations and trade unions, a considerable role for other organized economic interests, collective wage bargaining, regulation and more government intervention in the economy at large.


The Dutch so-called Polder Model is a variant of the Rhineland model, but with a number of extras. It is named after the famous Dutch polder: an area of low-lying land that has been reclaimed from the sea and is protected by dikes. Fully one-quarter of the Netherlands is below sea level. As people say: "God made the world, but the Dutch made the Netherlands." The polder is used as a metaphor to portray the collective struggle of the Dutch against the common threat of the sea which has fostered a habit of cooperation.


What about the extras I referred to before? First of all, the tradition of a succession of government coalitions of differing composition should be noted, since in the Netherlands no single party is big enough to achieve an absolute majority. In general, this means that politics is conducted in a less polarized way that forms a sharp contrast with political mores in neighboring countries. In the Netherlands, after all, opposition and governing parties change places on a regular basis: today's political opponents may be tomorrow's coalition partners.


A second major extra of the Dutch model: the institutional dimension, or the permanent consultative process in which social and economic issues are, as it were, de-politicized by regarding them as "technical" problems for which common solutions have to be found. The Joint Industrial Labor Council, in which employers and trade unions meet, and the Social and Economic Council (SER), which is a tripartite body, play an important role in this respect.


The Polder model is of mind-boggling complexity. It is a far cry from an ideal type free market economy and almost inexplicable to foreigners. (Believe me, I tried!) But it works. Until recently it worked exceptionally well.


In the 1990s, the remarkable growth of the Dutch economy has attracted considerable attention. Many international financial and economic journals acclaimed the Dutch Polder Model, while US President Bill Clinton, German Chancellor Helmut Kohl, and the then-Governor of the Banque de France, Jean-Claude Trichet (now President of the European Central Bank), stated that other countries, including their own, could well do to follow the Dutch example. And The Economist magazine described the Netherlands' economic performance as "the Dutch delight".


But over the last few years economic performance has substantially deteriorated. Both in terms of growth and the rise of unemployment the Netherlands nose-dived from the top to the bottom of the European league. This abrupt fall came as a surprise which, even among some high priests of the Polder Model, triggered doubts whether the successes of the 1990s should really be attributed to the blessings of the Polder Model as such, or that factors extraneous to it were responsible for the exceptionally good performance. And they came up with a array of alternative explanations, such as the demand boost because of the stock and real estate bubble and the highly competitive exchange rate of the Dutch guilder in the run-up to Europe's monetary union.


Now that these stimuli have worn out the Polder model shows severe cracks. It used to stand for the Dutch economic miracle, but today it is rather associated with diluted compromises and postponement of tough decisions.


The new government coalition which took office in May and which is composed of Christian Democrats (CDA), right-of-the-center liberals (VVD) and left-of-center liberals (D66) and led by Prime Minister Jan-Peter Balkenende, is aware of these problems. It has submitted a number of proposals to the social partners, comprising a wage freeze for two years and stricter eligibility criteria and/or reductions regarding early retirement, unemployment benefits and disability pensions. Initial trade union protests have been parried by some concessions by the government. In October, after a lot of haggling, a new agreement was reached between the social partners. On the face of it, the agreement marked a success for the Polder Model. And of course in view of dismal development of unit labor costs in the Netherlands, especially compared with its main competitors in Europe, the wage freeze was long overdue. But it remains to be seen whether the other parts of the bargain went far enough to bring about a turn of economic fortune.


The Polder Model provides a certain amount of predictability, stability and peaceful labor relations, which is highly valued by both employers and trade unions. The flip side is that it often leads to stickiness and paralysis of decision-making, because it requires long and arduous negotiations between the social partners. Moreover, it produce one-size-fits-all solutions that do not match the variety of needs of a modern dynamic and diversified economy. Finally, the process is profoundly politicized: social objectives ("solidarity") often prevail over economic objectives (efficiency and economic growth), which risks impairing the incentive structure and, in doing so, undermining the wealth creating capacity of the economy in the long run.


Economic reforms in the Netherlands fit into a broader pattern of similar measures taken in other parts of the European Union, such as Germany, France and Italy. On the whole it is clear that Europe has - at last - embarked on a major overhaul of its overgenerous welfare states, which are the hallmark of the Rhineland Model. It implies serious backtracking from earlier claims, announced at the Lisbon Summit in March 2000, when the EU boasted it would become the most competitive and dynamic knowledge-based economy in the world in ten years' time, capable of sustainable economic growth with more and better jobs and greater social cohesion ("capitalism with a human face"). But in view of huge problems which Europe is facing today, including the ageing of its population, this start is still very timid. Expect much more to come.


PS: Perhaps some (Anglo-Saxon) readers might still feel puzzled over what the Dutch Polder Model is all about after all. Others might feel that they are beginning to grasp it. For the latter it might be appropriate to quote Alan Greenspan: "If I seem unduly clear to you, you must have misunderstood what I said."


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