From economic crisis to strong, sustainable and balanced growth

Vrije Universiteit, Amsterdam November 4, 2009

Frank Heemskerk Minister for Foreign Trade

The Netherlands in the world economy

Source: OECD Source: UNCTAD

Germany

China

VS

Italy

The Netherlands

France

Spain

Canada

Belgium

UK

500 1000 1500 1750 0

Germany

China

VS

Japan

The Netherlands

France

Italy

Russia

Belgium

UK

200 400 600 800 1000 1200 0

Countries sorted by exports of goods, 2008 (billions of USD) Countries sorted by inward FDI, 2007 (stocks, billions of USD)

2250

The Netherlands: small country, big business

The 6th largest receiver of FDI

The 16th economy in terms of GDP

The 5th exporter of goods

The 7th investor in the world

The world’s 3th agricultural exporter

From crisis to sustainable growth: outline

1.   The great recession

2.   Challenges for the Netherlands

3.   International and domestic policy options

The great recession 1.

Balance on current account % of GDP

Balance on current account Billions of US dollars

10

-10

0

-5

20

25

15

5

2002 2004 2006 2008

US

China

Middle East

2002 2004 2006 2008 -1000

-500

-750

250

500

0

-250

Developing Asia

Middle East

US

Savings find way to US

Source:IMF

Correction housing market US

Housing prices US (% change, year on year)

Source: CPB

10

-10

-15

2005 2010 2000 1990 1995 -20

5

0

-5

-15

Purchase only (FHFA)

10 City composite (Case Shiller)

20

9

Correction stock markets

Tensions in the money market

jan -07 jul -07 jan -08 jul -08 jan -09

200

0

80

160

120

40

Spread between 3-month Euribor and Eonia-swap Basis points; weekly averages

Confidence collapses

Sharp downward trend world trade

-10

-5

0

5

10

-20

-10

0

10

20

03 05 07 09

World trade (month on month, rhs)

World trade (year on year)

World trade - volume % change

Source:CPB

Source: Thomson Financial. Calculation MG Source: Thomson Financial.

Public sector bears the burden

0

40

80

120

160

200

240

280

320

360

400

jan/08 apr/08 jul/08 okt/08 jan/09 apr/09

Ireland Austria Belgium Germany

0,0

0,5

1,0

1,5

2,0

2,5

3,0

jan/08 apr/08 jul/08 okt/08 jan/09 apr/09

Greece Ireland Austria Belgium

Percentage points Percentage points

Ten-year government bond yield spreads against Germany 5 years Credit Default Swap rates

/09 /09

2.0%

personal income tax

other expenditure measures

housing

infrastructure

corporate income tax

safety nets

indirect taxes

2009 2010

Large fiscal stimulus packages Composition of fiscal stimulus measures G-20 countries (% of GDP)

strategic sectors personal income tax

other expenditure measures

housing

infrastructure

corporate income tax

safety nets

indirect taxes

strategic sectors

unidentified measures

Perc

ent

of G

DP

(PPP

Wei

ghte

d av

erag

e)

1.5%

1.0%

0.5%

0.0% unidentified measures Source: IMF

Liquidity for business

Infrastructure and construction

Stimuli by local governments

FES projects

Employment Employment

Sustainable economy Infrastructure and construction

Stimuli by local governments

Liquidity for business

0.6%

0.4%

0.2%

0.0% 2009 2010

Sustainable economy

Composition of fiscal stimulus measures NL (% of GDP)

Source: Miljoenennota 2010

Development estimated budget balance (NL)

% of GDP

2009 2010

Budget balance Miljoenennota 2009 (Sept '08)

Revenues Revenues from sale of natural gas Expenditure unemployment benefits Stimulus packages Interest expenditure Budget balance local governments Other

Budget balance Miljoenennota 2010 (Sept '09)

1,2

-4,1 -1,0 -0,3 -0,4 -0,2 -0,6 -0,6

-4,8

0,8

-5,3 -0,6 -0,8 -0,5 -0,2 -0,7 1,0

-6,3

Source: Miljoenennota 2010

Spillover effects

Dutch financial institutions significantly exposed to (risky) assets abroad

Netherlands heavily depended on world trade => Stock management fuels world trade dynamics

Consumer and producer confidence hit by world wide turmoil

-80

-60

-40

-20

0

20

40

05 06 07 08 09

Consumer confidence (total)

Economisch climate (sub-indicator)

Propensity to consume (sub-indicator)

Spillover effects Consumer confidence NL Balance of positive and negative answers (seasonally adjusted)

Source:CBS

Consumer confidence (total)

Economic climate (sub-indicator)

Propensity to consume (subindicator)

19

Challenges for the Netherlands

2.

World economic outlook has recently improved – somewhat

IMF estimates world GDP to increase by 3% in 2010, after contraction by 1.1% in 2009

Mainly driven by developments in emerging economies - China +9% in 2010, India +6.4%

Weak recovery in advanced economies - US +1.5% in 2010, euro area +0.3%

Risks to the outlook skewed to the downside

CPB forecast NL 2010:

No recovery (economic growth 0%)

Unemployment rate to increase (to 615 thousand people, or 8% of the labour force)

Budget deficit to widen (to 6.2% of GDP)

Government gross debt ratio to rise (to 65.8%)

Outlook for the Netherlands: major challenges

-6

-3

0

3

6

3

4

5

6

7

8

9

94 96 98 00 02 04 06 08 10

Unemployment rate (% of labour force) Real GDP growth, rhs

Unemployment rate and real GDP growth (NL)

Source: CPB Real GDP growth (%), rhs

Government gross debt and budget balance (NL)

Source: CPB

-10

-8

-6

-4

-2

0

2

40

50

60

70

80

94 96 98 00 02 04 06 08 10

Gross debt Budget balance, rhs (% of GDP) Budget Balance (% of GDP), rhs

Labour

Capital Growth

Effect crisis on potential output/growth unclear

Productivity Total Factor

Potential growth scenario 1: Japan, 1991

40.000

35.000

30.000

25.000

20.000

15.000

1970 2005 2000 2010 1990 1985 1995 1975 1980

growth=3.1%

10.000

45.000

g=1.1%

potential growth before the crisis

potential growth after the crisis

GD

P p

er

cap

ita (

20

08

US

$ ,

PP

P)

Crisis

Source:OECD

Potential growth scenario 2: Finland, 1990 40.000

35.000

30.000

25.000

20.000

15.000

1970 2005 2000 2010 1990 1985 1995 1975 1980

growth=2.2%

GD

P p

er

cap

ita (

20

08

US

$ ,

PP

P)

Crisis

potential growth before the crisis

potential growth after the crisis

Source:OECD

potential growth after the crisis

Potential growth scenario 3: Sweden, 1990

40.000

35.000

30.000

25.000

20.000

15.000

1970 2005 2000 2010 1990 1985 1995 1975 1980

GD

P p

er

cap

ita (

20

08

US

$ ,

PP

P)

growth=2.8%

growth=1,6%

Crisis

potential growth before the crisis

Source:OECD

National and international policy options

3.

Shanghai River, China 1980

30

Shanghai River, China 2005

31

Sheikh Zayed Road, Dubai, 1990

11/9/09 Ministerie van Economische Zaken 32

Sheikh Zayed Road, Dubai, 2003

A. Crisis policy still needed

Dutch cabinet has taken action (I):

Implementing stimulus packages (more than 7.5 billion euro = 1.3% of GDP, 2009-2010)

Allowing automatic stabilizers to play fully (more than 60 billion euro = ± 10% of GDP, 2009-2010)

Increase of public debt largely driven by interventions and automatic stabilizers Decomposition of NL government gross debt dynamics (% of GDP)

-8

-4

0

4

8

12

16

08 09 10 11 Budget balance Interventions financial sector Denominator effect Other financial transactions d(debt ratio)

Source: Miljoenennota 2010

Dutch cabinet has taken action (II):

Investing in social coherence and sustainable economy

Implementing structural reforms (e.g. raising retirement age)

Ensuring long term sustainability of public finances

Tackling protectionism and promoting world trade

Special focus on trade promotion

Additional resources to export credit guarantees schemes Trade credit insurance is a useful tool for firms to insure against the risk of late or non-payment and stimulates exports

Economic diplomacy E.g. economic missions, trade promotion, facilitation of cross border investment

Stress need to avoid protectionism E.g. in context of EU/ G-20

Special focus on trade promotion

“Trade conflicts breed non-cooperation, suspicion, bitterness. Nations which are economic enemies are not likely to remain political friends for long.”

Harry Hawkins (1944) Director Economic Affairs Office of the U.S. Department of State

B. Need to reform global economic governance (I)

Improving (international) regulation and supervision

Raising capital requirements

Establishing framework for cross-border crisis management

Need to reform global economic governance (II)

Improving macroeconomic policy coordination

Addressing global imbalances

Strengthening voice & representation of emerging and developing economies

C. Need to move towards sustainable growth

Corporate social responsibility a balance between people, profits and planet

Compensation schemes in line with long-term performances

Improvement of corporate governance

Green trade to cope with climate challenges

Conclusions

Greatest challenge to the world economy in our generation

The public sector plays an increasingly important role

Dutch government has taken decisive action to cope with (the consequences of) the crisis

Need to move toward strong, sustainable and balanced growth

Discussion

1. Economists have missed the social and environmental dimensions of economic development

2. The public sector does and should play a bigger role in the economy

3. The Netherlands has a major role to play on the world financial stage (e.g. in G-20, IMF)

4. The costs of the financial crisis are equally distributed between generations

5. The Dutch cabinet has appropriately increased the retirement age

Discussion

Economists have missed the social and environmental dimensions of economic development

Discussion

The public sector does and should play a bigger role in the economy

Discussion

The Netherlands has a major role to play on the world financial stage (e.g. in G-20, IMF)

Discussion

The costs of the financial crisis are equally distributed between generations

Discussion

The Dutch cabinet has appropriately increased the retirement age