Remarks by Angel Gurría, OECD Secretary-General
23 - 24 April 2014, The Hague, Netherlands
(As prepared for delivery)
Minister Kamp, Secretary Dekker, Ladies and Gentlemen,
I am delighted to be in The Hague today to launch three important reports that the OECD has prepared on the Netherlands: our 2014 Economic Survey, our Innovation Review and our Territorial Review.
I would like to take this opportunity to thank the Dutch government for its support, leadership and commitment in seeing these ambitious projects to fruition.
Today we are gradually exiting the worst economic and financial crisis of our lifetimes. Yet after a 6-year slowdown, the recovery remains fragile, uneven and hangs very much in the balance. The Dutch economy has not escaped this harsh reality, experiencing a double-dip recession since 2008. At around 7%, the unemployment rate is lower than the OECD average, but it has more than doubled since 2008.
To revitalise growth and reduce unemployment, the government has initiated significant reforms of the housing market, the healthcare and the pension systems. Substantial fiscal consolidation has also been achieved. Planned labour market reforms should increase job search incentives and lower labour market segmentation.
These reforms are progressively paying off and we project growth to gain momentum and reach 1% this year and 1.3% next year. Still, sizable slack persists and potential growth is about two percentage points lower than at the beginning of this century.
As a small open economy, the outlook for the Netherlands is very much influenced by developments in other countries. With growth in Europe and in the rest of the world poised to remain moderate at best, the Netherlands can’t expect a strong economic push from abroad. The country therefore needs to work on its domestic policy settings to support growth. As the scope for monetary and fiscal policies to revive the economy is limited, the main way forward is to “Go Structural” as we, at the OECD, have been saying for years.
The three reports focus on exactly that. And the structural policy challenges that they discuss are interlinked. Repairing household and bank balance sheets would boost access to finance of SMEs. Higher credit availability would improve the financing of innovation and spur the growth of young businesses. A balanced territorial development would lift standards of living across the whole country, so that stronger growth, better jobs and higher wages benefit all citizens.
Let me elaborate on the main recommendations that emerge from our analysis
Increasing the resilience of banks
A first priority for reform, which is picked up in the Economic Survey, concerns the banking sector. Even though banks have made progress to meet Basel III standards, they remain vulnerable to solvency and liquidity shocks. With total banking assets amounting to more than 4 times GDP, this presents a significant risk.
To make the banking sector more resilient, prudential regulation needs to be strengthened, in particular for the biggest banks. The authorities’ goal expressed in their “Banking vision paper” of a leverage ratio of at least 4% for systemically important banks is commendable. They could even consider a higher ratio, as Switzerland did for its biggest banks.
Reducing household debt – which, as a share of disposable income, is the second-highest in the OECD – is also important for raising resilience. Due to falling house prices and high loans, 40% of mortgage borrowers currently have negative home equity. If these people have to sell their homes, they would not be able to repay their debt.
In addition, many borrowers have “interest only” mortgages. These are risky, as borrowers are only paying back the interest until the full amount of capital is due when the loan matures. To address this problem and increase incentives for amortisation, authorities should accelerate the reduction of mortgage interest relief once the housing market starts to durably recover. The maximum value of new loans should also be set lower than the value of the property.
Promoting the development of efficient SMEs by boosting innovation
A second priority for reform is the promotion of efficient SMEs. These enterprises are an important driver of economic activity. In the Netherlands, however, start-ups rarely mature – many never grow beyond one employee. A stronger business environment for young firms is therefore crucial, with innovation being its key element, which is the focus of our Innovation Review of the Netherlands.
The Netherlands has a long and proud history of innovation and is among the most advanced knowledge economies in Europe. But there is an urgent need to do even better to lift productivity from its current low rates of growth, and to ensure that the country continues to thrive in the face of mounting international competition.
To strengthen innovation performance, the OECD Review finds there is a need to broaden the base for innovation and engage more firms in such activities. The government’s “Top Sectors Approach” which focuses public resources on a number of select areas, needs to be strengthened. Since its launch in 2011, this approach has led to stronger cooperation with the private sector and knowledge institutions and has helped to align public research with the industry’s needs. But there is room for improvement. Most importantly, smaller and entrepreneurial companies need to be better represented; while additional sectors, with a need to increase innovation, should also benefit from its results.
Changes in the mix of innovation policies can also help broaden the base for innovation. The current system of R&D tax credits is well designed, but it cannot address all the barriers to innovation. Complementing it with competitive and well-designed support – e.g. for joint R&D with knowledge institutions – would encourage more ambitious R&D. It would also better serve the needs of innovative SMEs that I already mentioned as a priority for the Netherlands.
Maintaining world-class public research, particularly in universities is also important to strengthen the basis for innovation. Universities need stable and sufficient funding for fundamental research to remain attractive knowledge partners for firms. Moreover, while the OECD supports the strong emphasis on the commercialisation of public research, this should not draw away from other benefits of university research, such as its crucial role in the development and diffusion of skills.
Exploiting the economic potential of all Dutch regions
A final reform priority that I would like to highlight concerns territorial development. In countries with multi-level governance systems national policies are influenced by regional and city-based needs and aspirations and need to respond to them. This is especially relevant for the current period of fragile economic recovery and high unemployment, where the Dutch government is searching for new ways to unlock the growth potential of its cities and regions.
Our Territorial Review of the Netherlands examines the economic performance of different parts of the country. It also shows how to get the best possible performance from all cities and regions by better aligning policies and improving governance structures. If these fail to reach their growth potential, so will national growth.
In this respect, an important challenge for policymakers is to enable the country’s large metropoles – Amsterdam, Rotterdam and Eindhoven, to mention a few – perform at their growth potential. Currently there is still room to improve their performance according to our analysis. This will increase their competitiveness at the European and global level, help raise national growth while also nurture the potential of the entire urban system.
To address this challenge, it is important to improve inter-urban connectivity and to target policies to the relevant economic scale. In this regard a National Urban Policy Framework, which is currently lacking, can better match policies to the needs of the entire urban structure that make up the Dutch economy.
One of the most pressing challenges that the Dutch economy faces today is the need to “do better with less”. In this respect, the report highlights the need to better coordinate regional policies across the various ministries and agencies involved. For example, the incentives created by the Top Sectors Approach could be better aligned with those of the regional cluster policy and the EU smart specialisation agenda.
Decentralisation can also help ensure that all regions and cities thrive and participate in the economic recovery. The ongoing decentralisation reform is therefore very welcome. However, it is important that this reform adopts a medium to long-term horizon so that all actors have time to adjust to the new tasks and functions.
In addition, the national government should actively involve citizens and other local stakeholders in the process, and provide incentives for municipalities to cooperate as well as mechanisms to ensure democratic legitimacy. This will help restore people’s trust in government – a crucial factor for a successful reform process.
Ladies and gentlemen:
Allow me to congratulate the Netherlands once again for all the important achievements it has made over the past years. These reforms have created a solid basis for the country’s economic recovery. However, more remains to be done. The three OECD reviews, which we are launching today, point to some areas where additional progress can be made in order to further increase the growth potential and the resilience of the Dutch economy.
The OECD stands ready to support your country in achieving these goals and in implementing better policies for better lives for all Dutch citizens! Thank you.