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Home , Dutch disease, Polder model

[Lecture]

Dutch Experiences of Industrial Relations and Employers' Role

A.H.G. Rinnooy Kan (Member of the Executive Board of ING Group)

Excellencies, ladies and gentlemen,

It is a great privilege for me to address you on one of the prime export products of the : the model. It is not so famous as our flowers and cheese and in Korea certainly not as famous as Guus Hiddink. However, the constructive consultation between the , the employers and the trade unions has certainly attracted international attention.

It is a pleasure for me to talk to you about this topic for which I have a special affinity, not only in my current position as member of the Executive Board of one of Holland’s main employers, but certainly also from my previous position as Chairman of the Confederation of Netherlands Industries and Employers from 1991 to 1996. During this time, I was intensively involved in the tri-partite consultation between the social partners.

Before going into the blessings of the , let me take you along for a look back in time to see what economic and social indicators led to the creation of this typically Dutch phenomenon. The Netherlands has always had a very . A small country, situated at the mouth of some of Europe’s most important waterways, the Netherlands has always been a trading nation. In the 17th century, our country was politically and economically one of the most powerful nations in the world. That golden age was followed by a period of economic decline. The Netherlands lagged behind its European peers in responding to the changes of the industrial revolution. After the Second World War the Dutch economy prospered, helped by a broad consensus and a strong common determination to build up the country after the traumatic early forties.

1 Right after the war the Netherlands led the way internationally in building up an extensive social security system. In the late 1960s and early 1970s delegations from several countries came to the Netherlands to see how beautifully we had shaped our social security system. We had implemented an occupational disability insurance based on social risk and we had introduced an old age provision that entitled the entire population to a decent pension. But the cost of that wonderful system took its toll when the Netherlands was struck by a stagnating economy, massive unemployment and company bankruptcies in the late 1970s.

Two oil crises, an international recession and out of control public spending had made the Netherlands the sick man of Europe. People spoke about the . The Dutch were a pitiful people, and there were serious doubts as to whether things would ever come right for us. It was better to stay away from a patient as sick as that. And if there was anything to be learnt from the Netherlands and its economic policy, it was above all how not to do things.

The government, the employers and the trade unions all realised that drastic changes were necessary to turn this situation around. They also understood that they had to work together to develop a recipe for economic recovery. And, they had to implement it consistently, during many years.

In fact, the contents of the necessary recipe were well-known to all the insiders. What was needed was courage of the representatives of employers, employees and politics to say it aloud. And even more courage was needed to act upon it. That is exactly what the social partners did when they came together in a villa in Wassenaar, a suburban area of the Hague, in November 1982 and reached an agreement. The main elements of this agreement were the following: The trade unions admitted to the employers the crucial importance of recovery of profitability, and therefore the need for moderate wage cost development. Employers admitted to the trade unions the importance of a better distribution of work; this concession triggered the process of wage cost moderation; which afterwards became far more important for getting more work. And the government – though it was not party to the Wassenaar Agreement – admitted towards the social partners that they, employers and trade unions, were primarily responsible

2 (for better and for worse) for the wage cost development, to be established by means of free negotiations. This acknowledgement has had a disciplinary effect on the social partners, as opposed to the continuous resort by the government to interfere in order to control wages during the 1970s. And also very important for the success of the whole process, the government now took its own responsibility for of the labour and healthy government finances. In order to also get room for lowering and some premiums as support for moderate wages and a fruitful investment climate.

The recipe worked. The remarkable and employment record in the 1990s was noticed by the international community of journalists and economists. The Dutch polder model began to be discussed in a wide variety of international newspapers and circles of foreign economists and politicians.

It was not long before a whole series of foreign delegations began visiting the trade unions, the federation of employers and the government to ask about the developments that were taking place in the Netherlands.

Indeed, in terms of economic growth, the Netherlands climbed from a straggler in Europe to forerunner in the 1990s. In terms of employment growth, the results were even better: the move from rear to front was realised already in the mid-1980s. Not only has the number of persons employed grown faster than the European average. Employment in full labour years increased as well.

Finally, in terms of restructuring government finances, the Netherlands showed a good performance as well. The criteria to participate in the EMU were met without too much difficulty. Our budget deficit, though very high in the early 1980s, was well below 3% and public debt showed a downward trend.

Why did the Netherlands perform better than (on average) the rest of Europe? Was there a well-hidden secret? No, there was not. That may be a little bit disappointing to you. But it is the truth. Blood, sweat and tears were at the heart of the Dutch recovery. A lot of hard work and sacrifices made by the government, the social partners and the individual enterprises and

3 employees to implement structural improvements. If there was some magic at all in the process, it was that the Dutch changed course sooner than their neighbours.

There are four factors that can explain the favourable course of the Dutch economy from the mid-eighties to the late nineties. a) Steady wage cost moderation; b) Lower taxes by trimming and modernising the and the ; c) Increased flexibility and dynamics; d) And good relations between social parties and politics (Polder Model).

I will elaborate a bit on these four factors.

Steady wage cost moderation The key condition to the success of our Polder Model has been the moderate development of wage costs. This really has been a condition sine qua non. It has enabled us to achieve and maintain a substantial recovery of profits since 1982 and therefore of investment and employment. The foundation for this has been laid during the first half of the 1980s when yearly development of real wage cost per employee became at average 1% below the European average. This moderate wage cost development was primary achieved by the social partners themselves in collective labour agreements. But it was supported by the steady lowering of the collective burden. That wage cost moderation was realised throughout the Dutch economy.

Tax reduction by trimming collective sector The second important element was the government’s efforts to relieve the collective burden. The wage cost moderation achieved by the social partners in collective labour agreements has been closely linked to a supporting policy of cuts and reduction of social security premiums. Through this policy, the government managed to create a certain increase of purchasing power for employees almost every year. This allowed social partners to agree to a moderate wage cost development in their collective agreements. As a result, the share of taxes

4 and social security contributions in total wage costs per employer (the so-called wedge) decreased steadily. A development unparalleled anywhere in Europe.

You may wonder how such a policy could have been financed. Because there was not only the need for lowering the collective burden. The budget deficit had to be brought down as well. Two fundamental processes did the trick.

First of all, the government started to cut down on collective expenditure, in particular of the Dutch welfare state, our social security system, which had got completely out of hand. One of the important measures was the lowering of the annual increase of the level of social security benefits by cutting the automatic linking with the rise of wages. At a later stage, the system itself was more fundamentally restructured with stricter entry criteria and privatisation of several parts of the social security system.

Secondly, the job growth resulting from moderate wage cost development in itself created room for lower taxes and premiums. The number of tax payers increased while the number of beneficiaries diminished.

More flexibility and dynamism The third aspect which explains the favourable development of the Dutch economy in the nineties was the strongly improved flexibility of the labour market. Flexibility can be realised at different levels: both internally, within companies, and externally. Two very important developments in this respect were the growing number of temporary work agencies in the Netherlands (the answer to our not so flexible legislation relating to dismissal) and the increase in the number of part-time jobs, which offered employers and employees better opportunities to adjust labour to their needs.

But legislation too has contributed to more flexibility and a more dynamic economy. Examples are the extension of the laws on working hours and shop closing hours and the stricter legislation. However, more flexibility is not just a question of legislation. Just as important is a change of attitude and behaviour of trade unions, politicians and the general public. A change of attitude allowing companies to restructure unprofitable activities

5 with the necessary speed. From the early 1980s, Dutch companies did that on a seemingly larger scale than in many other countries.

Good relations between social partners and politics Knowing that the right socio-economic policies are needed for a good economic performance is one thing. To get the policies accepted and implemented successfully is another. This brings me to the fourth of the most crucial factors: the strongly improved relations between the social partners and between politics and the social partners. This is the body of the Dutch Polder model. Let me therefore describe in more detail the role of the social partners in building up the successful performance of the Dutch economy in the 1990s.

As the saying goes, success has many fathers. But in the case of the successful turnaround of our economy since the 1982 crisis, this is really true. We owe this success to the combined efforts of government, employers and employees and their organisations to choose the right policies and to stick to these in a rather steady and sensible course together. Without each of these parties, it would not have been possible. The reason is simply that neither of the three controls all the instruments for a sound social-economic policy, taking into account their respective responsibilities. For instance, a moderate wage cost development depends on the behaviour of the social partners, but also on the politicians’ willingness to support the development by introducing tax cuts and deregulation. On the other hand, each of the parties by itself is able to entirely undermine and block a healthy social-economic policy, when it evades its own share of the responsibility.

It is perfectly clear now and understood by all the key players that the government, the employers and the employees have to rely on each other. Otherwise, it will not work. This crucial discovery was made in the Netherlands in 1982, sooner than in most countries in Europe. That discovery of simple human truth behind the dikes had much to do with the economic abyss into which we had plunged in the preceding years. An abyss much deeper than in most other countries. In 1982, we realised that we had to rely on each other to get out of it.

6 The parties stuck to this recipe of well-divided responsibilities. It has not always been easy, it even could have turned out rather badly, but as the recipe started to bear fruit – the much desired job growth – the support for continuation and strengthening of the recipe grew as well. We realised that growth requires teamwork.

Excellencies, ladies and gentlemen, it is often said that history repeats itself. This is certainly also the case with the Dutch economy and the polder model. After the Dutch economy had served as a role model for the rest of the world, things started to go wrong at the end of the 1990s. Perhaps, we were blinded by our own success, but gradually the policy and austerity and discipline started to slip. Salaries increased, as did pension and health care costs. Unemployment began to rise again and the number of people that relied on disability benefits increased substantially. As a result, Dutch companies lost their competitive advantage over competitors in other countries.

The current state of the Dutch economy is not too rosy. Economic growth in the Netherlands is expected to shrink in 2003 as a result of all main three components: private consumption, private investments and exports. We hope for a slight improvement in 2004, but weak private consumption and the deteriorated competitive position will hamper the economic recovery in the Netherlands. Economic growth is expected to be below the EMU-average for the fifth consecutive year.

You can imagine that a few weeks ago, when I received the invitation to make this presentation to you about the blessings of the Dutch economy, I was rather hesitant. After all, after a miraculous recovery for 15 years, the Dutch economy looked like slipping back into a crisis resembling the one we faced at the end of the 1970s.

But fortunately, I was saved by the bell. Two weeks ago the social partners and the Dutch government suddenly revitalised the polder model in a way which was very similar to the developments that led to the Wassenaar agreement in 1982.

7 In its budget statement for 2004, the Dutch government had announced drastic cuts in the Dutch social security system, which had again run out of control. Curtailment of early retirement schemes, increased costs for health insurance and far-reaching measures to reduce disability benefits were key points in the government’s action plan.

Once again, just as at the beginning of the 1980s, we have realised that the government, the employers, the trade unions and individual companies and citizens must work together to pull the Dutch economy out of its current crisis. Two weeks ago, the Dutch government and the social partners reached a historic compromise. The trade unions agreed to freeze wages for a period of two years in return for postponement of the measures to change early retirement schemes and disability benefit arrangements. There is still much discussion about the compromise among the members of the trade unions, but I am confident that the revival of the polder model will be successful. We did it in the past and we can do it again. It is to be hoped that we will learn from history and continue the discipline of restraint, so that we will not fall into the same trap again as we did in the past five years.

Excellencies, ladies and gentlemen, the key question today is, can the Dutch polder model be exported to South Korea? This overview of some key economic indicators shows that our economies are different in several respects. But there are also similarities, the two countries are currently going through a difficult period and they both have to cope with a weakness in domestic economic demand. In the longer term the prospects are more favourable. As this graph shows, the South Korean economy will grow at a considerably faster pace than the Dutch economy. The acceleration of worldwide trade and a gradual pick-up of domestic demand give rise to careful optimism.

Another important feature that our two countries have in common is that we both are an important hub for our respective regions in . The Netherlands has traditionally been a gateway to Europe and South Korea is a hub for trade and would like to expand in this field with and within Asia.

8 The future economic success of our countries will largely be determined by our ability to maintain and strengthen that position as a regional hub. It goes without saying that stable labour relations play an important role in that process. We have to be realistic that the acrimonious industrial relations in South Korea are a source of concern to foreign investors and stand in the way of promoting your country as business hub in Asia.

However, we certainly believe that your government has taken a number of important steps to structurally improve the relationship between employers and trade unions. President Roh seeks to create a culture of voluntary dialogue between representatives of employers and employees and wants to put an end to management’s traditional reliance on the public authorities to intervene on their side. The government’s new policy of exercising restraint in interfering with disputes, of unbiased implementation of criminal laws and of improving mediation deserves wide domestic and international support. The move towards trade unions for public servants, the implementation of a 5-day working week and more lenient policies for foreign migrant workers are also significant steps forward. Another proof of the South Korean government’s firm intention to bring about a structural change in labour relations, is that it expresses a keen interest in learning from the European experience.

Can the Dutch polder model become the role model for achieving more amicable labour relations in South Korea? Of course, we have to take into account that the structure of trade and industry in Korea differs considerably from the Dutch situation. In the Netherlands, most companies have democratic management structures and well-organized employee participation. Large companies have a two-tier board structure in which the Executive Board is overseen by a Supervisory Board that is mainly composed of independent outside members. The new proposals in the Netherlands strengthen this system of checks and balances even further. In South Korea, the companies have management and consultation structures that are quite different from those in Dutch companies.

9 Nevertheless, I feel that a number of basic lessons we learnt from our polder model can also prove their value in your country.

Let me share our observations and experiences with you.

1. Awareness of crisis To begin with, a crisis, of course helps. The turnaround of Dutch social partners and politicians towards cooperation and good policies has everything to do with the very serious economic and budgetary crisis in the early eighties and now again in the first years of the 21st century. The common awareness of crisis is fertile ground for cooperation.

2. Trust Secondly, you need a basic trust between the main players: employers, trade unions and the government. They must have the willingness to build up the social-economic order together and to take up the responsibility for it. Sometimes shared responsibilities, but much more often separate responsibilities.

3. Institutional framework Thirdly, you need institutions to exchange information, to give advice and to reach agreements. In the Netherlands these institutions are the Labour Foundation and the Social- Economic Council. Both institutions were established shortly after World War II, but their tasks developed over the years. The Labour Foundation is an advisory and consultative body of the social partners. It draws up broad recommendations that are used by social partners themselves on a decentralised level and it gives advice to the government. The Social- Economic Council is made up from employers, employees and independent representatives. It is an advisory body for the global outlines of social-economic policy in the Netherlands.

I think that this institutional framework is in fact a typically Dutch ‘invention’. Something that cannot easily be copied or exported. But adjusted in the right way the Dutch model can be of help in other countries as well.

4. Pragmatism of small steps

10 The fourth lesson is to follow a pragmatic approach of consistent steps rather than choosing for big revolutionary steps and a major ideological turnaround.

5. Create win-win situations The fifth and probably one of the most important lessons is the strategic attention for trying to create win-win situations for all parties at decisive moments, such as wage cost moderation for profits and shortening of working time and flexibility for security.

In summary, these experiences from the Dutch situation can be brought down to three C’s:

- The first is the C of consensus. Consensus is needed about the bottom line of good policy between all key players in the economic and political process; about profitability as an absolute must and therefore wage cost moderation and differentiation, about the need of healing public finance and reform of the social security system, about tax reduction and the introduction of more flexibility and competition into a wide range of protected domestic sectors; - The second is the C of cooperation. Cooperation between the social partners and the government. Job growth in our modern economies is more than ever teamsport; - And the third is the C of consistency. Quick solutions don’t exist for structural problems. They ask for a policy of progressive steps consistently pursued.

This sounds easy, but the implementation of these lessons is, of course, much more difficult. It is a long and painful process, but I believe that the Netherlands has shown that it is possible to restore public finances and at the same time create employment. This does require, however, a prolonged and consistent application of austere macro-economic policies, supported by dynamic micro-economic policies, i.e. a package of mutually reinforcing measures across all sectors of the economy and all segments of the society.

Our country succeeded in making the polder model a success in the 1990s, but in recent years we let the reigns slip and now we have to stand shoulder to shoulder to apply the basics of the model once again. The social partners and the Dutch government realised that just in time.

11 In coping with the current crisis, the pension arrangements were among the key topics of discussion. I dare to declare that the Netherlands has one of the best developed pension systems with a good balance between the basic state pension in the first pillar, employer- employee pension plans in the second pillar and individual arrangements in the third pillar. Nevertheless, the future affordability of a decent retirement income for an ageing population is a serious concern in our country.

I truly feel that pension arrangements will also be a key issue in labour relations in South Korea. The government realises that the current ‘severance pay system’ does not function adequately as a means to secure a good old age income. Though I understand that employers and employees have widely differing opinions, there is a consensus that changes need to be made and the government is responding with pension reform proposals.

My company ING is the largest private pension provider in the Benelux and among the top five in the . We offer pension products and services in about 30 countries and based on this broad internatioal expertise we are frequently asked by national to advise and assist on drafting and implementing pension reforms. It goes without saying that we would be happy to make our expertise available to the South Korean government.

That also goes for sharing the experience with the Dutch polder model. The Dutch government, the employers’ federation and the trade unions are certainly prepared to share the lessons learnt in the field of labour relations. In this respect, I hope that this symposium can get a follow up in a broader context.

Excellencies, ladies and gentlemen. Last year, a Dutch coach, Guus Hiddink, guided the Korean soccer team to successes at the world championship that no one had thought possible. The entire world was enchanted by the dedication, the enthusiasm and the technical abilities of the Korean team.

It would be too much to say that implementation of the Dutch polder model will make South Korea champion of the . However, I do believe that the Dutch expertise can

12 help your country to build better and more amicable labour relations and thereby reinforce your country’s position as a vital hub in Asia. I thank you for your attention and will be pleased to respond to your questions.

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