Isn’t the Dutch economy too dependent on industry?

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. He addresses the question of whether the Dutch economy is not too dependent on industry. “No matter what you have, there are advantages and disadvantages to everything.”

Both the production volume and the number of new orders from Dutch manufacturing are under pressure. According to the Dutch Association of Purchasing Managers (Nevi), activity is showing the biggest decline since May 2020. The Nevi’s so-called purchasing managers’ index for September came in at a reading of 43.6. A level of 50 or more indicates growth, below that indicates contraction. Jan Swart, sector economist at ABN Amro Albert, referred to this number at BNR as a “very bad figure.” And he believes that “it’s not over yet, this malaise”. That is bad news. Not least because more and more companies in the industry are now cutting staff as well. “Companies used to hold on to staff with the idea that the market would pick up, but we are now seeing for the first time that the industry is cutting jobs,” Swart explains. With this, the industry’s disappointing development is also having a negative effect on the Dutch labor market. The question is therefore whether the Dutch economy is not too dependent on industry?

13 percent of GDP

“Industry’s share of the gross domestic product, due to a variety of developments such as the shift of labor to low-wage countries, has sharply declined since the 1950s to where it is now at about 13 percent. This certainly does not make industry the largest sector of the Dutch economy. Business services, for example, account for 15 percent of the gross domestic product. It also kind of depends on how you count. If you take government, education, health care and welfare together, you end up with 21 percent,” Kalshoven tells us. Still, it’s more about industry than you might suspect based on that 13 percent. “Industry accounts for an eighth of the Dutch economy, but for a much larger part of the economic fluctuations. That’s because of the stock effects. Demand only needs to fall slightly to cause a big drop in production. Otherwise, warehouses will get overcrowded. But the purchase of raw materials and semi-finished products is also scaled back. It works through the chain in a reinforced way.”

Industrial companies thus influence each other, Kalshoven says. “Including in terms of knowledge.  There is a lot of, partly implicit, knowledge within companies, but it also arises through mutual interaction. And don’t forget: many business service providers or educational and research institutions play a role in that. If you take away a piece of industry, the value of an economic cluster diminishes.  In other words, that damages the ‘ecosystem’.”

Added value

Consequently, Kalshoven believes that one should not be too scornful of industry in relation to the Dutch economy. “The added value is greater than you see at first glance. Take exports, for example: industrial products lend themselves well to export. The same is not true for many services. After all, the barber, the pub owner or the bicycle mechanic can’t export their services.”

But, Kalshoven also acknowledges, too much industry is not feasible for the Netherlands. “We are only a small country, and industrial estates quickly run into spatial limits. Although I do think you could look differently at how we use our land; more than half of it is set aside for agriculture. While that sector - along with forestry and fishing - represents less than 2 percent of the economy. That said, there are other issues at play now, such as an overcrowded power grid.” After all, this prevents businesses from being connected.

On top of that, according to the expert strategist, there cannot be only healthcare and services in a country. “There are advantages and disadvantages to everything, which is another reason why it is good to have many different economic activities. Don’t bet on one horse, but spread the economic risks. That also encourages innovation, which in turn is good for a country’s economic development. If you only grow bananas, it’s hard to add extra value.” In that respect, Kalshoven says the Netherlands is fine. “We don’t have a monoculture, like Detroit had with its auto industry. That city proved very vulnerable during the period when the auto industry was down. The once flourishing economy went down hard and all sorts of (social) problems arose in Detroit. That is less likely to happen to the Netherlands. In the past, of course, we did have the mine closures in Limburg and we saw the textile industry leave the east. But on a national level, we certainly don’t have a sector that dominates.” 

The relationships

But how are the relationships between the sectors developing? Kalshoven thinks that the decline trend in the share of industry in the Dutch economy may well be halted “The fact that activity in industry is now declining is partly due to the economic cycle and partly due to post-pandemic effects. With the end of the pandemic, people started traveling and visiting restaurants again, and yes, consumers can only spend their euro once. In addition, high interest rates inhibit investment in machinery, especially industry is affected.”

But Kalshoven also sees another development. “The ‘de-industrialization’ was accompanied by globalization. Now you see that companies no longer want to be completely dependent on countries like China. Also, the ‘low wages’ argument is becoming less important. After all, wages in China are no longer that low.” Besides, the Dutch knowledge economy is running at full speed. Kalshoven: “With innovation and AI, we will also be able to organize production more efficiently in the future. If we work with less labor, it will make less difference what that labor costs. We won’t have to go abroad so much anymore. In short, industry is and always will be important to the Dutch economy, along with the other sectors. We have a good mix and good distribution in the Netherlands. So, we are not all that dependent on industry.”