When did it all go wrong?

by Peter Knorringa and Hubert Schmitz

Most of us feel that the prospects for our future are very uncertain because we are facing several crises simultaneously. Environmental sustainability is probably the biggest one. The key question is what we do about it. How do we make the right decisions now? This blog asks what insights history provides about taking the right or wrong decision. 

From fossil fuel to renewable energy and from throw-away to circular economy

There is agreement that the material standard of living of the Dutch population is very high – amongst the highest in the world.  A standard of living has been reached which was unimaginable 70 years ago in the aftermath of the Second World War. There is also agreement amongst many people that continuing on the same path is not sustainable. Carrying on as before will destroy the planet. We need to accelerate two changes: from fossil fuel to renewable energy and from throw-away to circular economy. 

Debate on these issues has gone on for some years and is intensifying. There is however surprisingly little discussion on when and why the Netherlands began to embark on this unsustainable path. Was there ever an opportunity to embark on a very different trajectory? At first sight this seems an idiotic question. After all, the current problems are problems of success. Once you have success, you build on it and attempt to get better and better, especially if you are competing in the global economy. One thing leads to another, and indeed has led to the current dilemma. Unscrambling such a dynamic and bringing about a big shift in direction is extremely difficult. We have come to realise this in recent times. Several years of green policy making have brought some improvements but earlier brown investments continue to do harm.  The environmental and climate risks are increasing rather than decreasing despite recent efforts. Where does this leave us? Are we the prisoners of our own history? 

We are constrained by history, but history also provides unexpected opportunities.

Our answer to this question is NO. We are constrained by history, but history also provides unexpected opportunities. One such opportunity arose when the Second World War ended. The Dutch population had suffered and was hungry for food and basic consumer goods. Dutch entrepreneurs who had been forced to produce for the German war economy were keen to cater for Dutch demand.  They knew exactly what the local population needed and wanted.  Production capacity was largely intact. Initial estimates of destruction were high but later assessment showed a decline in capital stock of 12 percent or even less. As regards the working population, relatively few human lives were lost in the Netherlands, except for the very high percentage of the Jewish population that had been deported and killed. Notwithstanding this tragedy, skilled and unskilled labour were relatively abundant in the Netherlands at the end of the war.  Raw materials, however, were hard to come by. Scarcity was extreme; as was the need to reuse, repair and recycle. Using these severe constraints as opportunities and stimulating frugal innovations as the way forward was a realistic option. What was needed was a government which would recognise this option and see that in the midst of deep crisis lies great opportunity.  

The institutional conditions for swift action were favourable. One of the great achievements at the time was the speed of rebuilding the Dutch government apparatus.  The war on Dutch soil had gone on until early May 1945 when finally the Northern part of the country was liberated.  Impressively, by June 1945, a new Dutch cabinet was installed to oversee the recovery of the economy. 

One could have expected the new government to have a clear priority: direct the entrepreneurial capacity and talents toward fulfilling the basic needs of the suffering Dutch people.  This would have meant an explicit programme of fostering local small and medium enterprises.  In order to be effective, such a programme would have had to be decentralised. While being a small country, regional variations were substantial, especially after the war when transport links were destroyed. Moreover, the scarcity of materials and scarcity of foreign exchange called for policies that push towards making optimal use of the available materials by repairing, recycling and innovating in frugal ways. The Dutch people are famous throughout the world for their frugal mindset and innovative spirit. What was called for was fostering these strengths. 

A decentralised approach

This is not what happened. The overall emphasis in policies adopted at the time took the Dutch economy in the opposite direction.  Instead of prioritising local enterprise, the government wooed foreign enterprise. Instead of adopting a decentralised approach, in which each region finds its own way of addressing the most pressing shortages, the government adopted a centralised approach of industrial renewal. Instead of having a motto of fulfilling basic needs of the local population the government motto was to change Dutch identity towards an imported model of industrial modernity. Let us elaborate. 

The Netherlands engaged with fervour in a new industrialization strategy. Attracting foreign enterprise was a central part of this strategy. In the post-war years, the Netherlands lured more US companies to set up shop in the country, with subsidies and tax holidays, than the rest of Europe put together. The Dutch organized this through dedicated offices in New York and Chicago, which were also involved in using Marshall aid funding to buy some of the latest (agricultural processing) machinery from US suppliers.  

In these early years after the war, central government policy focused on changing the identity of the Netherlands from a country of small farmers and traders with a significant colonial empire, to an industrial society based on low wages, low prices and export promotion. A centralized ‘one counter’ policy was coordinated by the Directorate General for Industrialization, bringing together activities originally under the responsibility of the Ministries of Economic Affairs, Social affairs, Finance, Domestic Affairs and the Dutch Central Bank. This policy probably prolonged austerity for the local population. More importantly, in the long term it meant adopting the American industrial model and American way of life, instead of building on local needs and local strengths.  Instead of going with the grain of Dutch culture and adopting a frugal path, the economy succumbed to the dictates of the throw-away economy.  

We are not setting out to rubbish the policies which were adopted at the time. We recognise that the policy debate at the time was not influenced by concepts such as ‘frugal innovation’ or ‘circular economy’ which inspire today’s debate on sustainability. Environment or climate change were not on the agenda.   Other concerns prevailed. The Dutch government genuinely believed that a centralised export-promotion policy would be best for the country. They consciously sough to bring about a shift towards a new and modern economy, based on an idealized perception of the shining American example. This industrialization drive was also to ensure jobs for the around 50,000 retired soldiers coming back from Indonesia after its independence. Moreover, the quick rise of the German economy in the early 1950s offered rapidly expanding export opportunities for the Netherlands.  

For decades, this strategy received international acclaim and was in later years also ‘exported’ to newly industrialising countries in Asia. Albert Winsemius, one of the original architects of this Dutch policy advised Singapore in the 1960s and 70s on a similar export promotion policy, when he was leading the United Nations Development Programme (UNDP) Industrial Survey Mission. In turn, also the Singaporean trajectory was held up as a shining example of successful industrialization to less developed countries in Asia and Africa in the 1980’ and 90’. However, in more recent years it has become increasingly clear that this strategy is not sustainable.    

Arguing with hindsight is tricky. Industrial policies pursued at the time could not benefit from concerns with environmental sustainability which only hit us more recently. Some would argue that the policies were successful in their own right and addressed key concerns at the time. It remains however puzzling why this policy debate was not driven by the key problems experienced by Dutch entrepreneurs and Dutch people: extreme shortages in materials. Why was this not uppermost in the minds of the key policy makers at the time? Could it be that these policy makers came from privileged backgrounds? That they did not experience shortages in their lives? That they had little insight in the world of small businesses buzzing with impatience, drive, energy and ideas? Could it be that the shine of the American model blinded the policy makers to the potential for frugal innovation in local businesses? Or was there an American influence, for example through Marshall aid, limiting the room for manoeuvre for Dutch policy makers? 

But we need a reminder that opportunities arise from time to time which make it easier to change track. 

These reflections on our history do not contain a recipe for action. They are meant to influence the way we think about options for the future.  We hardly need a reminder that change is difficult for all of us.  But we need a reminder that opportunities arise from time to time which make it easier to change track. Reflecting on the last 70 years of our history, most observers would probably agree that current uncertainty is very high.  Crises are lurking on several fronts.  We have just come through a mega crisis – the Corona pandemic – which disrupted our lives in ways which were unimaginable in 2019. In the course of 2020 and 2021, Governments intervened in drastic ways which we would have thought unacceptable beforehand.  Public expenditure was pushed up dramatically to save lives and save the economy. It was again an opportunity to change direction fundamentally, but it was not used. The longing to go back to what we had enjoyed before prevailed – despite overwhelming evidence that continuing on this path is not sustainable. In the early days of the pandemic many observers suggested using this crisis for a fundamental rethink, but these have been fading away as the present COVID-19 pandemic seems to subside, at least in Europe. What will it take for us to be more determined in the next crisis and seize opportunities for more fundamental change?