Show some Dutch courage, Mr Blair

In Holland, capitalism has a friendly face. And it works, says Rick van der Ploeg

The Labour government has been greeted with ill-disguised relief by Britain's European partners, from whom it can learn a thing or two, I believe. The Dutch economy, in particular, has performed well for many years and bears study.

In 1983 unemployment there stood 2 percentage points above other European countries. Now it is half that and five percentage points below the rest of Europe. At 6.5 per cent it is close to that of the United States and lower than Britain's. The purple coalition of social-democratic and market- oriented parties has created almost half a million jobs in four years and has done this while maintaining the social fabric and an equitable income distribution.

The Dutch have also trimmed the public sector deficit to about 2 per cent of national income (from 10 per cent) and arrested the growth in the ratio of government debt to national income. At the same time the government has lowered taxes for business and citizens and undertaken massive public investment programmes. Sound monetary policy has also guaranteed a strong currency, low inflation and low interest rates.

How has this all been achieved? Wage restraint and pegging the value of the guilder to the mark have both dramatically improved competitiveness. Unit labour costs have remained roughly constant during the last 15 years (while elsewhere in Europe they rose by 3 per cent annually) and the share of profits in value-added more than tripled. These two factors fuelled the boom in exports, private investment and employment while wage moderation induced enterprises to use less capital and more labour, so labour productivity growth has been less strong. Consequently employment has grown rapidly despite modest growth of the gross domestic product.

The unions have exacted a price for restraint in terms of policies geared to improving job prospects and training. Companies that hire the long- term unemployed, employ low-paid workers or provide apprenticeship schemes and child-care facilities receive preferential tax treatment. Workers for their part have agreed to working at weekends and at night in exchange for shorter hours. The boom in part-time work has contributed to the flexibility of the economy and increased the number of women in employment.

Critics of European monetary union who argue that the unemployed need monetary expansion are wrong. Once wages catch up with inflation, monetary expansion only leads to more inflation and a weaker currency, not more jobs. The Dutch would argue that monetary expansion is a sneaky attempt to cut wages and fool the unions. Trust is built by negotiating with unions and offering tax cuts, training, child-care and shorter working hours in exchange for wage moderation and more flexible working.

Another factor behind the Dutch miracle is that the government has pruned social security. Not by cutting the generous level or duration of benefits but by tightening eligibility, improving the efficiency of the system and introducing market-oriented reforms in disability and sickness insurance. As a result social insurance premiums and labour costs have fallen, further spurring job growth.

What are the lessons for new Labour? Firstly, the government should engage in a dialogue with trade unions and business. These social partners should be encouraged to take a long-term view and invest in each other, with the emphasis on training rather than hire-and-fire where jobs become obsolete. It is essential in this respect that negotiations take place at an industry level rather than at individual firms to cut out freeloading.

Secondly, cutting taxes should feature at the top of the new Labour agenda to create incentives for wage moderation, shorter working hours, training and child-care. Rather than cutting the level of social security benefits Labour should use the idea of tax credits to make it attractive for people to accept a job. Reform of the social security system should ensure that flexi-workers get similar entitlements to those with tenure. In a dynamic economy flexi-workers take all the risks and they should not be penalised for doing so.

Thirdly, European integration will fail if it does not move beyond the common market. Gordon Brown should be congratulated for giving the Bank of England responsibility for controlling interest rates. The next step is to join European Monetary Union.

The British economy has stormed past other European economies in terms of world competitiveness thanks to market-oriented reforms. Still, the Organisation for Economic Co-operation and Development points to The Netherlands and Ireland as examples of how capitalism can work with a friendly face. Labour can learn from these neighbours. Consensus, security and social justice can go hand in hand with flexibility and rapid growth in jobs. That is the challenge for Labour.

q Rick van der Ploeg is a financial spokesman for the Dutch parliamentary Labour Party and a professor of political economy.