VVD


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Kabinet

1-11-2006

Gerrit Zalm: niemand zit te wachten op een grote coalitie

Een grote coalitie van PvdA en CDA is het slechtste dat het land kan overkomen.

Het voorbeeld van Duitsland laat zien tot welke besluiteloosheid zo'n coalitie leidt. "Zo'n grote coalitie is een optelsom van de stilstand van het CDA en de achteruitgang van de PvdA", aldus Gerrit Zalm in een speech op de Erasmus Universiteit tijdens de STAR Management Week.

De volledige speech van Gerrit Zalm:


1-11-2006

Renovation of Old Economies: a never ending story

Een grote coalitie van PvdA en CDA is het slechtste dat het land kan overkomen. Het voorbeeld van Duitsland laat zien tot welke besluiteloosheid zo'n coalitie leidt. "Zo'n grote coalitie is een optelsom van de stilstand van het CDA en de achteruitgang van de PvdA", aldus Gerrit Zalm.


1. Introduction

Ladies and gentlemen,
First of all I would like to thank the organisation of the STAR Management Week for inviting me and talk about this very important subject. In this contribution I would like to discuss with you 3 misconceptions:
1. Globalisation is a threat;

2. We are an old economy;

3. We do not need further reform;

In the end I will conclude with the way forward and, as the elections are coming, I will also comment on issues in the campaign.

Misconception 1: Globalisation is a threat

Ladies and gentlemen,
The world around us is changing, and is changing rapidly. Well-known trends like globalisation and ageing have a major impact on our societies, our economies and the world around us. Globalisation makes the world a smaller place; distance dies. In the last 25 years, international trade has tripled. Important factors behind this growth are the introduction of ICT and decreasing transport costs.

Some people claim that globalisation is a threat for western economies. This is a mistake. I would like to state that globalisation is essentially positive. The rise of the 'Asian Tigers', China, India and the Eastern European countries show that these countries profit from international trade and that poverty in these parts of the world is rapidly declining. The slogan "No Aid, but Trade" works! At the same time we, in the western world, profit from the lower prices of our consumer goods and the rising demand for western goods and services.

There are negative consequences as well. People in Europe are afraid of losing their jobs because of the shift of production to low cost countries. However, recent studies of our economic research institute CPB show that - on balance - we benefit from the economic growth in these countries. For example, the Dutch economy in the last decade has gained 23.000 jobs from trade with China. And because of the lower prices of consumer goods from China, Dutch inflation was on average 0.2 percent lower per year. The average Dutch household therefore benefits by no less than 300 euros per year. Another study of the CPB shows that the employment effects of the globalisation in total are positive, not negative. The outsourcing of activities to low cost countries is compensated by the creation of new jobs in the Netherlands.

So, to sum it up, globalisation is not a threat.

Misconception 2: We are an old economy

Ladies and gentlemen,
The title of this congress, 'Renovation of Old Economies', suggests that we live in some sort of open-air museum. Some political parties may think so and even join demonstrations to retúrn to an old economy. And guess what, these demonstrations took place on the "Museumplein" (museum square)!!

"Old Economies" is often used as a nickname for the traditional EU-member states. Critics claim that these countries are inflexible and not innovative, are unable to adapt to new circumstances and lack fiscal discipline.

The group of EU-countries is not a homogenous group. The Netherlands differs from Germany, United Kingdom or Italy. The diversity within the European Union is even bigger since the entry of 10 new members. Some of these countries have a very steep learning curve. They learn from our mistakes and are able to 'leap-frog' up the 'value chain'.

The economist Andre Sapir distinguishes four groups of countries within the 'old EU'. In his view the Nordics and the Netherlands combine high efficiency of the economy with a high level of equity. On the other end the southern European countries like Greece and Italy score low on both efficiency and equity. Between these there is a group of countries some of which score high on efficiency, like the UK, and other countries score high on equity, like Germany.

The performances of the EU-economies differ as well. For example, if you compare the Netherlands with Germany, UK and Italy on economic growth and unemployment rates, you see a striking difference. Since 1990 cumulative economic growth in the Netherlands is higher and the unemployment rates are lower. So, it is a mistake to talk about the 'old European economies'.

Ladies and gentlemen,
Now I would like to focus on the Netherlands. The claim that we, in the Netherlands, have an old economy is a misconception as well. Within 50 years the structure of our economy has changed dramatically. The share of people working in agriculture and manufacturing has declined sharply. In the same period the share of people working in the commercial service sectors has grown rapidly, from roughly 30% in 1950 to almost 45% nowadays. Thanks to, rather than despite of, these changes we have become wealthier.

The dramatic change of the structure of the economy is not typical for the Netherlands. Most of the countries in the EU have undergone a similar change. However, the difference with some other countries is that we over the last decades have put considerable effort in reforming our welfare state arrangements. We have created more flexibility on the labour market and improved our international competitiveness.

Over the past four years we have intensified our reform process. Institutional reform was key. Most of our institutions were created in the 1960s and 1970s. These institutions were not suitable for the 21st century. It was our objective to shift more responsibility from the government to individual citizens; to diminish the administrative burden created by the government; And to create a more activating social security system.

We have reformed a large part of our labour market institutions. We reformed the disability scheme and social assistance; Shortened the duration of the unemployment benefit; And stopped subsidizing early retirement by means of the tax system. These reforms have a positive effect on labour supply and therefore contribute positively to the performance of our economy on the long term.

At the same time we have started to reduce the 'administrative burden'. We are successful in this field. We have changed or abolished annoying rules. We have cut down on the number of licenses and forms. In four years time we diminished the administrative burden for companies with more than ¤ 4 billion.

After the reform of the tax system for personal income in 2001, we recently reformed the corporate tax. In 2007 the corporation tax rate will be 25,5 percent, compared to 34,5 percent in 2003 (29,6% in 2006).

And last but not least, we have implemented more competition within different types of welfare state arrangements. For instance, the financial responisbility of our social assistance was moved from the central government to local government, creating more incentives for these local governments. Another major example is the introduction of a new system of health care insurances in the Netherlands. Insurers will play an essential role in negotiating prices and quality of health care products with the health care providers. Competition between the insurers will lead to a more efficient health care system. Employers can choose for a private disability scheme.

And I am glad that we, as Dutch government, didn't falter in our reform agenda, despite the low popularity figures. We went ahead and we only have to look at countries around us to see that we took the right course.

Benefiting from the institutional reforms, economic growth has picked up. Today we have a high income per capita, the lowest unemployment rate of the EU, a very high productivity per hour worked, an attractive business climate and a budget surplus.

So to conclude this part: we are not an old economy! We have been renovating constantly, particularly over the last four years.

Misconception 3: We do not need further reform

Ladies and gentlemen,
Some people argue that the reform agenda has been completed, that we have done enough and are ready for the future. In my view there is no room for complacency. Change is a constant factor. The renovation of our economy is a never ending challenge.

I would like to compare it with the story of a bird called the 'Dodo'. A beautiful bird living on Mauritius. But unfortunately this bird was too fat, too slow en not able to adjust to new inhabitants. That's why this bird is extinct nowadays. The example of the Dodo shows that it is essential to continually adapt to new circumstances. Therefore, a different world needs different government arrangements. Otherwise, we do not talk about old economies, let alone new economies, but of 'collapsed' or 'extinct' economies. The government has the responsibility to create new and better conditions for entrepreneurs and employees to develop, create and trade new products and ideas.

Ladies and gentlemen,
As you might know, there are elections in the Netherlands at the end of this month. A lot of the political parties talk about the need for reform, the need for higher labour participation and the need for more flexibility. However, these parties are very hesitant in carrying out the necessary reforms. They are afraid that the voter will punish them.

Indeed, it is true that people are sometimes afraid of new challenges. Like Mancur Olson described in his famous book "The Rise and Decline of Nations", people have the tendency to anxiously hold on to the world they know. Economies therefore get stuck and the necessary reforms are postponed. These countries need external shocks in order to cope with the changed world around them. However, this comes with major costs for society and high uncertainty for the citizens.

Fear for change is a bad counsellor. The claim that we don't need new reforms is in my opinion a third misconception. Postponing the needed reforms only creates an illusion of certainty! Sooner or later, changes are inevitable. For us politicians, it is better to have an open view for the future and the needed reforms, to announce these reforms early and to use transition periods for citizens to get used to the new situation. That is better then 'surprising' citizens with sudden action.

Ladies and gentlemen,
There are two challenges that make it necessary to go on with our reform agenda. The first one I have mentioned earlier; the ongoing globalisation. In order to gain from the positive effects of globalisation, we need an attitude for more flexibility and change. The second is the ageing of the society. Today there are 5 people working against 1 pensioner. This ratio will increase rapidly to 5 people working against 2 pensioners. Ageing therefore has consequences for the labour market, for economic growth and for the distribution of income over generations. It's my firm believe that we have to keep on reforming in order to benefit from international trade in the future, to absorb the effects of an ageing society and to maintain welfare growth.

I have a few suggestions for further reform:

First of all it is important that we continue to increase the dynamics on the labour market, also through decreasing the costs of 'hiring and firing'. Today employment protection in the Netherlands is a 'lawyers' paradise', creating high unnecessary costs for companies. It is 'sand in the engine of economic growth'. That's why I would like to streamline procedures for hiring and firing and to reduce the dismissal fee. This will create opportunities for those who are still an outsider on the labour market.

Second, it is important that we try to raise the labour participation of elderly people in the Netherlands. The participation figures of this group are very low: only 20% of the people age 60-65 are still working in the Netherlands. Countries like the US and UK perform much better on this account. Over half of the elderly still work. Easy exits from the labour market should be closed. As an extra stimulus, my party recently announced a new initiative to make it more attractive for employers to hire people of 55 years or older by reducing the non-wage labour costs.

Third we would like to go on with reducing 'red tape', for instance in the building and spatial planning sector. This will increase the supply of new houses, which promotes the functioning of the housing market. This works better than taking away tax benefits for house owners.

Fourth, it is important that we stimulate entrepreneurship in the Netherlands, for example via 'tax holidays' for start-ups. At the same time we want work to pay off by reducing all personal tax rates and increase work incentives.

And fifth, we have to keep investing in the innovative power of our economy, through the education- and research system. Therefore we want to invest more in innovative research, in cooperation between universities, more quality in education and more choice for students.


4. Conclusion
Ladies and gentlemen,
I would like to end this contribution with some concluding remarks.

I have discussed three misconceptions and my conclusions were: globalisation is not a threat, we are not an old economy, but we dó need further reforms. Sometimes it is easier to hold on to the world you know. However, in order to benefit from globalisation and retain our prosperity, we continually have to adapt our economy and our collective arrangements to the changing world around us.

Reform is not without precedent. The last decades we have been constantly reforming our welfare state arrangements. In the last four years we have intensified this process. These efforts are not without result: our economic growth is picking up, the unemployment is one of the lowest in the European Union and our productivity per hour worked belongs to the highest in the world.

Bu we are not finished. People who claim that we can sit back and do nothing are wrong. 'Renovation of old economies' is a never ending challenge. We need politicians who have the will and the courage to carry out these necessary reforms.

Ladies and gentlemen,
Last week the CPB Bureau for Economic Policy Analysis published an analysis of the electoral programmes of the different parties. For me it didn't come as a surprise that the programme of my party, the VVD, scores best on topics as economic growth, employment and productivity on the long run. At the same time the VVD makes the public finances sustainable for the long run. My party is not afraid of the future and has the courage to carry out the necessary reforms. Only then we can benefit from the growth of international trade, the higher demand for western goods and services. Only then we can prepare ourselves for the ageing of society.

Talking about the will and courage to change; looking at the current polls, The Netherlands seems to be heading straight towards a coalition that nobody, I repeat: nobody, wants. Not politicians and certainly not the electorate. A grand coalition. Grand and uncomfortable. Uncomfortable because it would mean a coalition of one party that sometimes seems ashamed of the reforms that have been brought about with the VVD, the Christian democrats. And the other coalition party, the PvdA, which, as we all know, deep in its heart wants to reverse the reforms, and at the very least is afraid to put real reforms on the agenda.

It is uncomfortable because no one can picture both party leaders in good cooperation. Such a grand coalition is the sum of the CDA's standstill and the PvdA's steps backward. Look at Germany, where the grand coalition plods along in its own lack of decisiveness. That's the spectre of the struggle for the Catshuis.

The only party that can change this is the VVD and that is my message now and in the next few weeks. Thank you!

Gerrit Zalm