How should the Netherlands earn its money in the future?

Published on: 7 September 2023

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: macroeconomist and expert strategist at APG Charles Kalshoven on the question of how the Netherlands should earn its money in the future. The answer is not conclusive.


The academic year is just around the corner. A good time for the FD to interview Robert-Jan Smits from TU Eindhoven. And that yielded a number of stark statements from the chairman of the board of the technical university, including about Dutch merchandising. “Sustainability provides so many opportunities for the Netherlands to make money in the future,” he says. “If we go to green hydrogen, electrolyzers have to be manufactured. Well, VDL can do that. There are plenty of opportunities for the Dutch manufacturing industry to make money from the energy transition. But then the government will have to do some things in a fundamentally different way.”


Smits believes that the government should stop the top sector policy (sectors that are doing very well in the Netherlands have been getting extra money from the government since 2010 to make sure they are doing even better. The chemical industry, the transport sector and life science, for example), and link that entirely to the major transitions of our time. Like the energy transition and the digital transition. “Sector policies should be replaced by linking subsidies to innovations that contribute to these transitions,” Smits said. But what does this mean for the economy? How should BV Nederland earn its money in the future?


Grow engines

“First of all, future growth does not have to come from the same things that caused growth in the past,” Kalshoven says. Growth engines, he says, can perish from their own success. “That sounds contradictory, but it’s true. In sectors with rapid productivity growth, wages also tend to go up rapidly. That pulls wages in less productive sectors up with it, otherwise workers would switch sectors en masse. The result is rising prices in the lagging sectors.”


APG’s macroeconomist backs it up with a classic example: the hairdresser. “They don’t have more customers than say, 20 years ago, but their prices have risen sharply.” His point is that with technological advances, sectors need fewer and fewer people. “As a result, an increasingly big group is working in the lagging sector. This is also called the Baumol effect (or Baumol’s disease, ed.).”


Schumpeterian effect

In addition to this development in macroeconomics, the so-called Schumpeterian effect also plays a role, Kalshoven knows. “Many technologies are promising, such as ASML chips, AI, sustainable energy solutions, water management and biotechnology. But it is still difficult to talk about the new engine of the Dutch economy. Again, success does not lead to a lasting large share of the economy. Take the lightbulb as an example. It replaced the candle and that was a huge market for Philips. Yet at some point its importance declines again as production becomes ever cheaper and the market becomes saturated. And that incandescent lightbulb itself has, in turn, been replaced by more attractive alternatives such as LED.”


On top of that, it also matters where production takes place, where knowledge is invested in and where profits and taxes flow. “Philips did not invent the incandescent lightbulb, but improved it considerably. With the proceeds from that technology, they started doing systematic research and many other inventions rolled out of their lab. Not all of those have become growth engines for the Dutch economy, because, the better VCR, for example, lost out to a foreign competitor that sold better. But take ASML. Surely you can call that a growth engine. It really is a top company in the world and it started as a subsidiary of Philips.”

Take ASML. Surely you can call that a growth engine

Big transitions

However, Kalshoven does acknowledge the importance of focusing on the major transitions in areas like energy and digitalization. “The government can stimulate the economy in several ways. It is interesting what the British government did in the distant past. It made prize money available for certain desirable inventions. That encouraged private parties to do research and development. That way, the government can direct a lot of private money in the desired direction. The new knowledge can also be disseminated immediately so that everyone benefits. This is different from patents, where the inventor is rewarded with a temporary monopoly position that generates high profits.” And the government, Kalshoven argues, needs to create the right climate. “That’s not a problem. We have excellent education, people have confidence in each other and in the economy, and we have strong institutions; you can rely on the courts. Moreover, we are a tolerant country, and it is precisely in tolerant countries that people find each other, knowledge is shared, there is a lot of creativity and innovation occurs more quickly.”


It is also true that the Netherlands has a small, broad and open economy and is therefore very export-oriented. “We invest abroad, and that is also a form of investing in Dutch growth. It is precisely the investments in countries with a low capital-labor ratio, and thus high marginal productivity of capital, that help drive economic development here. Take the Dutch machine industry, with ASML at the forefront. Advancing machinery in other countries adds value to the Dutch economy.”


Better technology

But Kalshoven also points out a side note. “The government may well try to stimulate demand for a certain innovative product from a Dutch company, but that may still turn out to be the wrong choice. You may be overtaken by a better technology from a competitor in another country. Or by a cheaper alternative that works just as well. It is also not very efficient if governments of individual countries try to outdo each other. If you do have good reasons for controlling them, an approach at the European level makes more sense.”


In addition, it is proving difficult to build new industries with the same economic impact as existing industries, Kalshoven states. “The move to a greener economy absolutely must be made. Whether that will generate additional economic growth is the question, because you also have to write off old industries. But there are certainly opportunities for individual companies. If they advance the energy and protein transition and benefit from it themselves, society has a kind of double dividend, after all. It brings us closer to a more sustainable economy and society.” A point to note, however, is that the Netherlands faces obstacles. “An example: the energy transition requires a lot from the power grid. In several cities it is already no longer possible to connect new commercial complexes. We obviously need to solve these limitations as soon as possible.”


Kalshoven therefore concludes that it is difficult to predict in advance whether a focus on the major transitions will advance the Netherlands economically and become the new earning model for the B.V. Netherlands. “We must not rely on one big hit. Our strength is precisely that we have such a broad range of products. That gives us a good starting position to grab new opportunities as they come along. In other words, the competence to develop new competencies. In an uncertain world with unpredictable opportunities and threats, that is very valuable.”