Figure 2.3 Correlation patterns across national business cycles (quarterly GDP, 2000–2017)

Box 2.9 The cooperative cure for the Dutch disease

In the late 1950s, a large field of natural gas was discovered in the Groningen province, in the north-eastern part of the Netherlands. Briefly afterwards, the prevailing system of wage-setting, providing for moderation, loosened and the “cradle-to-grave” welfare state was substantially expanded. As a result, inflation rose, and with it the real exchange rate. Exports lost pace relative to imports. The current account, reflecting the underlying loss in competitiveness, widened. Still, on the back of the continuous flow of revenues from gas export, the Dutch guilder remained strong. In fact, too strong for export and import competing firms. By the end of the 1970s and after two oilprice shocks, manufacturing exports were in bad shape. Unemployment was high and inflation persistently higher than those in its neighbors and competitors. However, collective bargaining agreements were automatically indexed to inflation, resulting in a “wage-price spiral”—a vicious cycle. And public sector spending on untargeted welfare programs resulted in ever-increasing budgetary deficits. This period, starting in the mid-1970s, came to be known as the “Dutch Disease”. However, a decade later, talk was of the Dutch miracle: the “Polder Model”. How did this happen? The remarkable turnaround was created by an accord between the economic stakeholders—the “social partners”. This 1982 Wassenaar agreement was facilitated by the Stichting van de Arbeid (the Labor Foundation): a cooperation platform of employers and labor unions. It produced a program combining centrally-led wage moderation vis-à-vis Holland’s main competitor—Germany—including through shorter working hours. Devaluation might have been an option. However, devaluation vis-a-vis the Germany Mark would likely have been ineffective for an economy that was highly open and integrated with its main competitor and neighbor. In addition, the stakeholders understood that the Dutch disease was not a temporary problem to be solved by devaluation, but rather a structural one and therefore beyond the reach of monetary and exchange rate policy. The agreement was about sustainably improving competitiveness by keeping wage increases continuously below productivity gains and below German wages—the main competitor. In other words, the policy implemented was that of a coordinated targeting of wages in order to put downward pressure on the real exchange rate—a competitive devaluation that was to be sustained. The Wassenaar agreement is an example of a Dutch institution that embodies a consensus-oriented, practical approach to collective problems. Some would trace the historical origins of such institutions to the collective action that created and maintained the “polders”: the below sea-level, flood-prone lands reclaimed from the sea, starting as early as the 11th century. This is where the notion of Polder Model comes from. This could also explain why Dutch political consensus is highly evidence-based and data-driven: agreeing on the facts, first, helps forge consensus, later. This is also evident in an institution inspired (and led for a long time) by Jan Tinbergen (the first winner of the Nobel prize for economics): the Central Planning Bureau. The CPB does not plan. Instead, it evaluates the economic and fiscal impacts of political platforms and proposals, functioning as an impartial arbitrator and thus laying the groundwork for political compromise and consensus.

Sources: den Butter and Mosch, 2003; Hemerijck and Visser, 2001.

Box 2.10 Belgium: Keeping the real exchange rate competitive by decree

Since the mid-1970s, Belgian unemployment had risen rapidly, because of a wave of plant closures, which also produced negative consequences for public sector budgets. As in the Netherlands, 1982 proved to be the turning point. A stabilization plan was introduced, consisting of salary caps, budget cuts and, different from the Netherlands, an 8 percent devaluation relative to the German Mark (the anchor currency of the EMS). Moreover, going forward, a wage norm that set limits to wage increases beyond inflation was established, with the trajectory of wages in Belgium’s major trading partners as the ceiling. In other words, the wage norm attempted to keep the real exchange rate competitive.

In addition, a Conseil central de l’économie (CCE), consisting of employers’ and employees’ representatives, was charged to assess Belgium’s competitiveness and, if need be, suggest remedies. Finally, in 1989, the Law to safeguard competitiveness was introduced, allowing the government to intervene in case wages—a key component of the real exchange rate—threatened to undermine competitiveness. In 1996, this essentially legal macroeconomic framework was further tightened. Based on a joint report of the CCE and the Conseil national