Following the second oil crisis and the world recession of the late 1970s, Dutch unemployment rose to 12% in 1983, real GNP fell from 1980 to 1982, and public finances collapsed as social security payments rose and tax receipts fell. In Discussion Paper No. 467, Hugo Keuzenkamp and Research Fellow Frederick van der Ploeg maintain that the ruling centrist-conservative coalition responded with a policy of `benign neglect', by emphasizing the need to reduce the government deficit at the expense of other objectives and assuming that the labour market would solve its own problems.

Unemployment and the budget deficit both fell in the late 1980s, as a result of wage moderation by the trade unions, increased industrial competitiveness and the recovery of the world economy. The rate of long-term unemployment rose relative to that of almost all other countries and exerts no clear downward pressure on wages. Keuzenkamp and van der Ploeg attribute the fall in the budget deficit in part to wage moderation in the public sector which cannot be sustained if employees move to the private sector and also to short-sighted policy measures. These included the sale of public assets, which improved the government's cash position at the expense of its net worth.

Keuzenkamp and van der Ploeg formulate ten rules for `sound government finance' with which they analyse the relationship between savings, investment and the current account. Given the openness of the Dutch economy, the liberalization of international capital markets and the commitment to pegging the stock of nominal government debt, investment should have been financed through the current account of the balance of payments. The authors find, however, that the government made no effective use of the balance of payments to finance domestic investment: indeed, the current account was in surplus for the whole period.

Keuzenkamp and van der Ploeg conclude that maintaining exchange rate stability vis-à-vis the Deutschmark and increased monetary integration were beneficial to the Dutch economy. Its performance would have been improved, however, if the government had emphasized longer-term objectives (such as reducing long-term employment and maintaining public investment) and had sustained its current account by borrowing from abroad. The new, centrist-left coalition that has governed the Netherlands since the end of 1989 may improve economic performance by investing in the future, reducing long-term unemployment and stopping the decline in the government's net worth.

Savings, Investment, Government Finance and the Current Account: The Dutch Experience
Hugo A Keuzenkamp and Frederick van der Ploeg

Discussion Paper No. 467, October 1990 (IM)