Toespraak van dr. A.H.G. Rinnooy Kan, voorzitter SER, op de bijeenkomst van het Duitsland Instituut Amsterdam, 14 mei 2009, gebouw Eerste Kamer, Den Haag.
Alleen het gesproken woord geldt.
The invitation to this conference points out that our two countries, Germany and the Netherlands, share a common economic tradition, the so-called Rhineland model. That is true, but it does not cover the whole truth.
Challenging Neighbours Twelve years ago, our Netherlands Bureau for Economic Policy Analysis (CPB) published a comprehensive study on Rethinking German and Dutch Economic Institutions. Its title,
Challenging Neighbours, indicates the presence of some interesting differences between our countries. An obvious difference relates to the size of the two economies: in this respect, the Dutch economy is more or less comparable to North Rhine-Westphalia. But that is simply a fact of life; such a difference will not incite a learning process. More interesting are differences in institutions. Well, our two countries may be part of the same family, but it took our Bureau for Economic Policy Analysis some 500 pages to analyse the relevant differences between the two.
When the study was started, at the beginning of the 1990’s, the gut feeling was that it would be a one-sided learning process, that the German Social Market Economy would show us how to get rid of the Dutch Disease. The Social Market Economy being associated with long-term relationships, quality products, high-skilled labour, elaborate social security and co-determination (
Mitbestimmung) within the firm.
But institutional rigidities and German Unification strongly affected economic performance during the 1990’s. Different phenomena than before were associated with the Social Market Economy: unemployment, structural rigidities, resistance to change. The CPB then decided to introduce an outside challenger, the USA, representing the flexibilities of the Anglo-American model: dynamic and innovative, high start-up activity, high employment creation, fast reallocation of labour, physical and financial capital.
Consultation economy And by the time the study was published, in 1997, favours had also changed side between the two neighbours. Suddenly the world discovered the merits of the Dutch Polder Model or Delta Model. Our economic institutions were said to combine the positive features of the Anglo-American Model and of the Social Market Economy: flexibility and security.
By the way: I prefer to use the notion consultation economy because it does not suggest the existence of a kind of blueprint. What is the basic philosophy of this consultation economy? That there is a need for mutual co-ordination and co-operation because:
- In a modern market economy, social and economic policy-making is not the exclusive domain of government. Some policy instruments – in particular wage-setting – are in the hands of social partners: trade unions and employers’ associations.
- Using these instruments involves important interdependencies: whereas tax policy can influence wage setting; wage policies will help to determine the outcomes of government policies in terms of employment.
So mutual co-ordination of policies can improve our social and economic performance. That is why various institutionalised arrangements to adopt voluntary restrictions on behaviour, to build mutual trust, to lower transactions costs and to avoid damaging conflicts have been set up in our country. At the national level, there are two institutions that play an important role in social dialogue and in social and economic policy making: the Labour Foundation – a private, bipartite institution; and the tripartite Social and Economic Council, a public-law institution which is the main advisory body to government and parliament on social and economic policy issues.
Well, since the heydays of the ‘Dutch Miracle’ in the late 1990’s, new role models have ascended, in particular the Nordic countries. And I think the economies of both Germany and the Netherlands are now well positioned for a mutual learning exercise. So what about rethinking the Rhineland model?
Rhineland model
What exactly is the Rhineland model? What are its defining characteristics? In our country, some people identify the Rhineland model with Mitbestimmung and dislike it for that matter. I personally think this is a too specific interpretation of the model. In the Rhineland model, the enterprise is basically regarded as a long-term form of co-operation between various stakeholders – including workers. This contrasts with the Anglo-American enterprise model that is based on risk taking and the pursuit of shareholder value. But this co-operation between various stakeholders we have in common should not be associated with a country-specific type of corporate governance. Likewise, the fact that in Germany there are no institutions at the federal level comparable to the Labour Foundation and the Social and Economic Council, does not disqualify the German economy as a member of the Rhineland family.
Corporate Social Responsibility
The enterprise as a long-term form of co-operation between various stakeholders is one aspect of corporate social responsibility. The other aspect is a sufficient focus on the contribution to public prosperity in the longer term, by creating value in three dimensions: profit, people, planet.
For the late Milton Friedman, in a market economy the enterprise had one – and only one – social responsibility: “to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the games, which is to say, engages in open and free competition, without deception or fraud.”
Nowadays, this position is defended by Robert Reich - president Bill Clinton’s former Secretary of Labor and now professor of public policy at Berkeley. In his book Supercapitalism he argues: “Companies are neither moral nor immoral. (…) Companies are not citizens. They are bundles of contracts. The purpose of companies is to play the economic game as aggressively as possible”. He concludes:
The rise of what he calls “supercapitalism” has meant fantastically increased choices for consumer goods but also decimated public services, an end to job security and looming environmental catastrophe. Reich looks back to the period in America after the Second World War when firms really were socially responsible. Business leaders believed they had a duty to ensure that the benefits of economic growth were distributed equitably, in contrast to their modern counterparts. What changed? Back then, big American firms enjoyed the luxury of oligopoly, which gave them the ability to be socially responsible. Today's “supercapitalism” is based on fierce global competition in which firms can no longer afford such largesse. The U.S. leads in this dark trend, but Europe is right behind, Reich states.
I strongly disagree. Corporate social responsibility can make a difference, and does make a difference in practice. Robert Reich states that the intensity of competition nowadays prohibits any meaningful CSR-initiatives. That is not true. In fact, studies show rather large differences between companies within the same sector in how seriously they take their CSR. There are frontrunners and laggards, and the pack in between is moving steadily ahead, especially in the field of transparency. And the differences between companies are reflected in scores and indexes for both consumers and investors.
CSR is not charity. In fact, it is part of the core business of the enterprise and is often motivated by enlightened self-interest. CSR improves a company’s reputation (good name, positive image, goodwill) and increases its sales potential; CSR motivates employees (proud of their company) and makes it easier to recruit new employees; CSR contributes to risk management.
The globalisation of the economy and the opportunities of ICT and the Internet have indeed turned the world into a global village. The government is in retreat, and its power is waning. Civil society organisations and enterprises own a great deal of knowledge and are acquiring more power. That also means that they have responsibilities. “The ethical or moral spotlights have been switched from churches and governments to business.” That means that enterprises are increasingly being asked to account for their corporate social responsibility. By consumers, citizens, interest groups (environmental and consumer organisations, Amnesty International etc.).
This is the kind of approach the Social and Economic Council has chosen in its advisory report entitled De Winst van Waarden (the profit of values) that was published back in 2000. The number of companies that see CSR as a vital component of modern enterprise and report on their efforts has grown since. A colourful array of voluntary private and public-private initiatives has arisen at all levels – individual industry, national, European and worldwide.
International supply chains
Last year the Social and Economic Council has taken a second step – as a follow-up to its advisory report on Sustainable Globalisation: A World to be won. The Council adopted a Statement on International Corporate Social Responsibility. In the Statement, the Council calls on trade and industry to actively pursue responsible international business practices, including supply chain responsibility: a commitment by enterprises to exert a positive influence on the social and environmental policies of their suppliers. That commitment is voluntary, but it is not free of obligation. ILO Declarations, the OECD Guidelines for Multinational Enterprises and the recommendations of the International Chamber of Commerce on supply chain responsibility offer the normative framework to identify what can and should be expected of enterprises in their international operations. The central organisations of employers and unions represented in the Council have committed themselves to bring the Statement under the attention of their members, and start implementing the principles laid out in the Statement. I chair the special committee that will report annually on the progress made in introducing responsible supply chain practices.
Globalisation
The last two decades in particular, the world has been changing rapidly. In this changing world globalisation is the key development. One of our recent contributions of which I am particularly proud concerns the advisory report on sustainable globalisation which our Council issued last year. We all know that, apart from its ardent cheerleaders, many people have their reservations about globalisation. The clarification of the benefits of globalisation was timely as the discussion on globalisation tends to face some persistent myths.
Often newspapers talk about processes being outsourced to India; only rarely do we read about other countries outsourcing services to our economy. This stresses the need for politicians and other opinion makers to give citizens an accurate picture of the challenges, but also of the opportunities facing us.
In Denmark, a special committee presided by its prime minister Rasmussen some years ago engaged in a broad societal debate on the challenges and opportunities of globalisation. This discussion helped produce broad social consensus that the Danish people are well placed to benefit from globalisation if they keep on pursuing the right policies. It is not a surprise to me that in the Eurobarometer the Danish feature among the most confident populations when it comes to processes such as globalisation.
In the Netherlands also, the time was more than ripe for such a debate. Globalisation is all too often presented as a threat, even with so many people benefiting from it. This is true also for some members in our council, notably the representatives of trade unions. Nonetheless, I am happy to be able to say that in the advisory process, trade unions and employers have really come closer to each other and have reached an important consensus about globalisation.
The world is not flat
One of the key lessons of the report is that there is scope for own policies even in an increasingly open economy, basically for three reasons:
- Agglomeration effects: enterprises tend to cluster in order to take advantage of location-specific positive scale effects and spillovers. The world is not flat and never will be. Countries will never be identical, but continue to show important and interesting differences.
- The restricted mobility of labour.
- The limited tradability of a number of services. Services that are only partially tradeable or offshoreable include personal services, shops and healthcare.
This gives national governments ample policy space to follow their own socioeconomic agenda. Globalisation doesn’t just happen to us, nor does it tie our hands. A big – but efficient – public sector is perfectly compatible with economic openness, as proves the experience of the Nordic countries. Economic openness is not a threat to social insurance expenditure. A recent study carried out at the request of the European Commission also shows that fears about globalisation leading to “social dumping” are unfounded. For example, the systems in northwest Europe combine a relatively high level of income equality and a large public sector with high employment figures. At the same time, this study emphasises that the European systems must be modernised continuously.
The Nordics
An OECD index comparing countries on this ability to cope with globalisation shows that in fact the Netherlands is rather well equipped – somewhat better than Germany. There are some countries that do better. Interestingly, these are not only Anglo-Saxon countries such as the United States and Canada; Sweden, Finland and Denmark perform equally well. The Nordics score very high on this indicator owing to a combination of factors: a well-educated population, highly active labour market policies that provide a social safety net, and a strong innovation framework. The United States’ strengths lie on another plane, i.e. the flexibility of its product and labour markets. The comparison indicates that there is a broad range of different social-economic strategies for dealing effectively with the impact of globalisation at national level. This confirms that countries do in fact have the scope to select their own policy mix to cope with the challenges of globalisation.
Indicator of ability to cope with globalisation
But is essential for policy to key into the globalisation process by enhancing comparative advantages and the business location climate while easing the adjustment processes. On that basis, there is scope for governments to determine the policy mix that best matches their situation and preferences. Isolation from the world – the most extreme example being North Korea – is not an option because it is guaranteed to lead to a race to the bottom.
Challenges for the Netherlands
The Social and Economic Council believes that industrial relations will play an important role in ensuring the adaptability of the Dutch economy. Stable labour relations are an important business location factor. They can help channel market forces in the right
direction and mitigate the negative effects of structural adjustment processes.
What are the Netherlands’ strengths and weaknesses if we look at how it deals with the opportunities and threats of globalisation? The picture that emerges is complex. The following elements are of particular note.
The very low structural unemployment rate in the Netherlands is clearly a strength in international comparisons. But it is combined with a low effectiveness of the Netherlands’ labour market policy in matching unemployed job-seekers to jobs.
For innovation performance, the Netherlands is awarded an average score by the OECD. This position does not match the Government’s aim of moving the Netherlands to the top of the European innovation rankings.
The Netherlands gets top scores for real wage flexibility. Evidently, the Dutch labour market is capable of making rapid wage adjustments. The Netherlands is second only to the United States in these rankings. Our “consultation model” can therefore compare with the birthplace of the Anglo-Saxon model. Countries with a very corporatist economy, such as Finland and Sweden, are at the bottom of these rankings. But there are two dimensions to labour market flexibility: wages and employment inflow/outflow rate. The Netherlands has only a passable score on the final point, giving it an average total score for labour market flexibility.
Role of European integration
The Netherlands needs the European Union if it is to operate from a position of strength in the globalisation process. Like other EU member states, the Netherlands is too small to be able to influence and shape the rules of the game for the globalisation process as such, for example international trade. The EU, on the other hand, has sufficient mass to mould the process of globalisation in the interests of its citizens and enterprises, based on its common values and principles.
The EU is a community based on shared values: democracy, fundamental rights for individuals, a fair distribution of income and acceptable working conditions, sustainability and a social safety net. Its objectives reflect the broad concept of prosperity on the “Triple P” (people, planet, profit) concept.
The EU is also extremely important to the Netherlands when it comes to exploiting the advantages of globalisation and the position of Dutch trade and industry, basically owing to the scale advantages of the internal market. In addition, the EU plays a role in easing
the necessary adjustment processes.
For a strong Europe, we need strong member states and a European Union that is capable of operating effectively. The new Lisbon Treaty will allow the EU to function more efficiently in light of its enlargement and to tackle “new” cross-border issues such as climate change, terrorism and migration. The Treaty clarifies the division of powers between the EU and the member states and offers better guarantees that the public interest will be served. It also describes the European Union as a Union of citizens and member states, thereby confirming its unique identity.
The basis for the EU’s internal economic policy is the Lisbon Strategy, which dates from 2000 and aims to modernise the European economy. The focus is on increasing productivity growth and employment participation, as the major factors determining our future prosperity and our ability to cope with the effects of the ageing population.
In Europe, we have learned to manage diversity. We have learned it by trial and error in the past sixty years. And we had to learn it, in order to escape from our rich tradition of wars and conflicts.
Fortunately, a child born in Europe today will take much of the accomplishments of European integration for granted, like many of its more mature citizens do. She will learn to collect and to spend euros, will travel to European countries without any trouble, will be able to obtain her bachelor’s in one country and a master’s in another, work wherever in Europe she chooses to live, and reap the benefits of increased prosperity due to an increasingly integrated market. Many of her positive encounters with Europe will go unnoticed. Her negative encounters with Europe (or blamed on Europe as it may be) will unfortunately probably attract her attention to a much greater extent.
Many people in our country tend to see Brussels as posing a threat to ordinary citizens, restricting their freedom to choose. Of course, this possibility cannot be excluded. Every legislator is subject to a tendency of overregulation. But Europe has proven to be an effective exercise in deregulation at the national level by creating a European space without borders where citizens – as consumers, students, workers, entrepreneurs – can move freely whilst enjoying essential protection.
Europe is a success story in completing the internal market, creating new opportunities for consumers, workers, students and smaller and medium sized enterprises. But Europe is more than a common market. It is also a legal community to which Community law – including the principles of non-discrimination and equal treatment – is applied. The citizens of Europe are protected by common rules and standards regarding, e.g., work conditions relating to health and safety, consumer rights and the quality of the natural environment. In the context of European integration, we have succeeded in closing the governance gap at the supra-national level.
The debates we are having now within the SER on these subjects do strengthen my conviction that European integration will not only deepen and widen further, but will also contribute to sustainable development. So if you support the philosophy of the Rhineland model, it is wise to invest in European integration. That leaves ample scope for challenging each other to even better performances in all Triple P dimensions.