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Challenging Neighbours provides wide coverage of the German and Dutch economies, from an institutional point of view. Pensions, competition policy, labour relations, corporate governance, and health care are among the topics for which the institutional setting and performance of Germany and the Netherlands are compared. The difficulties and successes the countries have in facing pressures from aging population, developments in technology, and global competition are traced back to their institutional roots, and lead to mutual lessons for institutional reform for German and Dutch policy makers.



1. Comparing German and Dutch Institutions

What is so challenging about Germany and the Netherlands being neighbours? In terms of arable area (united) Germany is almost nine times the size of the Netherlands, the German population is over five times as large as the Dutch population and the ratio of gross domestic products of the two countries equals a factor six. From another perspective, consumption per capita differs to a much less extent and is in both countries among the highest in the world. Also, macro economic investment ratios are hardly different. So, why compare two countries, which apart from size seem to be so much alike? Yet, the structure of the enterprise sector clearly differs, just as several features of the welfare state. Do significant differences exist after all? These and similar questions may arise with a comparative study between Germany and the Netherlands. Accordingly, these considerations constitute the core subject of this introductory chapter.

2. The Interplay of Institutions, Trade-offs, Performance and Trends

Where in the previous chapter ‘Why?’ formed the leading question, this chapter focuses on ‘How?’. Chapter 1 examines why a comparative study is worthwhile, why institutions matter, why an analytical approach is useful and why Germany constitutes an important reference country. This chapter presents the analytical framework. It centres on the questions how institutions might affect economic performance and how long-term social, technological, economic and demographic trends influence the relationship between institutions and performance. Formal institutions, i.e. rules, regulations or policies, are the main focus of the study (Box 2.1).

3. Economic Development in Comparison

The economic performance of a nation strongly depends on the working of its institutions. The preceding theoretical chapter analyzed how institutions can affect the economic performance of an economy and how long-term social, technological, economic and demographic trends could influence the relationship between institutions and performance. In Chapters 5 till 14 this relationship will be analyzed in much more detail.

4. A Structural Comparison

The economic performance of a country depends on the way the existing institutions do stimulate or curb economic initiatives to optimize the use of the available resources in the national economy. Certain structural resources are ‘god’- given: natural conditions like climate and geomorphology, the presence or lack of natural resources and the availability or absence of natural ways of transport - seas, lakes, rivers -, belong to this category. Other resources are also ‘god-given’, but their value or character has changed due to human intervention: the environmental situation is a good example. Most other structural resources, however, are the inheritance of past investment decisions, in buildings, machinery, education, technological knowledge and transport infrastructure. Together they constitute the economic and natural structure of a country, determining to a considerable extent the maximal production possibilities of a country. Extending or adjusting that structure is an essential but at the same time slow process; essential because it determines the future production possibilities and hence the economic performance of a country, slow because of the time-consuming character of investment and its gradual impact on the existing stock for the different categories mentioned.

5. Governance of the Socio-economic Order: An Economic Perspective

After a presentation of indicators on welfare and wellbeing and a review of factors of production in the previous two chapters, this chapter marks the shift to the analysis of institutions. It focuses on institutions that affect the role of the state, divided into the socio-economic order and the political system, using the United States as a benchmark. The socio-economic order pertains to the relationships between the state, (representatives of) labour and capital and other social organisations.

6. Social Protection

Reform of social protection has played a central role in revitalizing the Dutch consultation economy. Compared to other European countries, the Netherlands was forced to start reforming its social protection system already at a relatively early stage, namely in the beginning of the eighties. At that time, a number of adverse macro-economic shocks to a system with generous and open-ended benefits as well as lax administrative controls had set in motion a vicious circle of an increasing number of benefit recipients and an erosion of employment. After doubling in the seventies from 0.6 million in 1970 to 1.3 million in 1980, the number of benefit recipients under the age of 65 (recomputed to full-year benefits) continued to rise rapidly at the time. Initially, the rising financial burden of inactivity was stopped through lower benefit rates, while the ratio between benefit recipients to those employed stayed more or less constant. Only recently did more fundamental reforms succeed in reducing the number of benefit recipients (see Figure 6.1).

7. Pensions

For two reasons, old-age insurance is an important topic for this study comparing the institutional framework of the German and Dutch economies. First, the German pension system differs substantially from the Dutch one. This increases the scope for mutual learning. Second, both countries will experience rapid aging over the next four decades. This poses serious challenges to the pension systems of these countries.

8. Labour Market: Institutional Environment

At present, the Dutch labour market receives acclaim for its strong job growth and decreasing unemployment rate. From a Dutch perspective, the high skill level and internal flexibility of German workers stand out. How can these and other differences in current performance be linked to labour market institutions? And, do economic trends require more flexible and diverse labour relationships, or is there a future for long-term commitment and cooperative exchange?

9. Labour Market: Institutional Arrangements

This chapter deals with cooperative exchange on the German and Dutch labour market. The structure is as follows. First, Section 9.1 addresses the collective bargaining systems in both countries. Next, Section 9.2 compares the German apprenticeship system to the Dutch system of vocational education at upper secondary level. Subsequently, Section 9.3 turns to the co-determination arrangements in both countries. Finally, Section 9.4 presents the main policy options from the labour market analysis in Chapter 8 and 9.

10. Corporate Governance

Why does this study focus on corporate governance: the institutions that govern stakeholder relationships between management, shareholders and creditors? Two reasons motivate the analysis. First, corporate governance institutions are important for company performance. Because of conflicting objectives of various agents and the incompleteness of contracts, corporate governance institutions are needed to strengthen company performance. Second, these institutions differ across countries, in particular between the United States and Germany. So a comparative study may provide scope to learn about the impact of such institutions.

11. Science and Technology Policy

Over the last years, German and Dutch policy makers have brought forward a series of initiatives in science and technology policy. In Germany, this is partly the result of the ‘Standort’ debate, in which the diminishing attractiveness of the German economy as a location for private research activities has been a popular topic of discussion. Furthermore, there is an on-going debate among German economists about the innovative performance of traditional sectors like machinery and chemistry. One of the main initiatives has been the merger of two ministries with separate responsibilities for science policy and for technology policy, into the new Bundesministerium fur Bildung, Wissenschaft, Forschung und Technologie. An other initiative concerns recent measures to support specific new technologies like biotechnology. In the Netherlands, the decreasing private R&D intensity in recent years has raised much concern among policy-makers. This has lead to an influential report ‘Kennis in Beweging’ (EZ/OCW/LNV, 1995) with a ‘plan de campagne’ for strengthening the knowledge base of the Dutch economy. One of the measures has been the funding of four technological top institutes that were jointly proposed and initiated by firms, universities and research institutions.

12. Regulation and Competition Policies

The central theme of this study is the effect of institutions on the economic performance of countries. This chapter discusses regulation and competition policies in the market for goods and services in Germany and the Netherlands. Current discussions on privatization and market liberalization illustrate the practical and policy relevance of this theme. Germany and the Netherlands have not been leaders in this field, but are catching up, affected by developments in the Anglo- Saxon countries, the creation of an internal European market, technological developments and modern market and regulation theory. Dutch examples are the large scale competition encouragement and deregulation operation and privatization of public enterprises, such as telecoms. In Germany the discussion on these themes is part of the so-called Standort-debate, which started in the early eighties.

13. Electricity and Gas Markets

The previous chapter offers a broad overview of the development of public institutions through the introduction of market forces in general. This chapter analyses in depth this theme in one field, namely the electricity and gas markets. This sector provides an excellent illustration of the topicality and relevance of the introduction of market forces. For decades it was taken for granted that electricity and gas provision were natural monopolies requiring heavy government intervention. This view is now subject to criticism. With competition the key word, the institutions in these markets are now being reformed in many countries, including Germany and the Netherlands, with the overriding aim of increasing efficiency.

14. Health Care

In recent years, the health care systems in most industrialized countries have undergone considerable diagnostics and treatment by analysts and policy makers. The symptoms that prompted the attention were the large increases in health care expenditures as a percentage of GDP, the increase in real per capita health care expenditures and the rapid rise in the cost per unit of health care relative to increases for other goods, especially in the United States. The Netherlands and Germany, as well as the United Kingdom, exhibited the above symptoms to a lesser extent than the United States (see Figure 14.1) but they required considerable political effort to maintain control over health care budgets. Furthermore, there is the prospect of potential future increases in expenditures as a result of aging and more heterogeneous populations, increased affluence, and new technologies.

15. Concluding Remarks

To what extent, then, do Germany and the Netherlands provide mutual challenges for institutional change, i.e. for social innovation as it was called in CPB (1992)? And what challenges are put to both neighbours by the apparent trends in the external environment?


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