Comparison of Dutch Economy and German Econmy in Last 30 Years

Comparison of Economic Growth between The Netherlands and Germany (1978-2009) Introduction About 16 years ago, when European Community became European Union(hereinafter to be referred as EU) , the Netherlands and Germany, as two founding members of the EU, have been played an important role in European and world's economy. When talked about Dutch economy, East indies company must be a start. As the first company in the world, it helped the Netherlands to be the leader of world's economy seventeenth century and to build Dutch entrepreneurship. The capital city of the Netherlands, Amsterdam, use to be the financial and business centre of the world. Later, Dutch economy has seen by many declined for a while. But, since 1980s, dutch government has reduced intervention, dutch economy become more prosperous and open again. To the east of the Netherlands, Germany stands in the central europe, as the largest national economy in Europe, ranked fourth by nominal GDP and fifth by GDP (PPP) in the world in 2008. After the industrialization, this country has become a driver and innovator in global economy. Especially when west and east Germany unified in 1990, the country's economy went out from the recession after second war's big hit. Compared these two countries' economic development, there are a lot similarities and differences due to its close position in Europe continent, culture background, and even history. This paper is organized as follow. Section 2 introduces briefly the concepts of economic growth and the key concepts in measuring economic development, section 3 explains how rule of law effect economic development in the Netherlands and Germany, section 4 presents the relationship between income distribution and economic development, section 5 describes cultural influence on economic development, section 6 consists of examples of successful entrepreneurship in the Netherlands and Germany, section 6 deals with the technology factor in economy in the two countries. Section 8 comprises comparison and conclusion. Section 1 1. 1 To start with the comparison,we need to define what economic growth is and the key concepts of economic development. At first, the economic growth we are going to study is long-run economic growth. Long-run economic growth is the growth of what an economy is able to produce given its labour force, knowledge, technology, tools, machines, land. It is not about the growth of what an economy actually produces, that type of economic growth is short-run economic growth. Economic growth implies increases in per-capita real gross domestic product (GDP), namely widening of the production scale in a country as a whole, or more efficient use of its economic resources to produce goods and services(Kibritcioglu, 2001). Real GDP is the value of final goods and services produced in a given year when valued at constant prices. It is the best measure of total production and the increase in real GDP is used to measure economic growth, as by comparing the value of the goods and services produced at constant prices we can measure the change in the quantity of production (Parkin, 2008, pp. 91). 1. 2 figures in the Netherlands and Germany Figure 1: GDP growth in percentage in the Netherlands and Germany(1978-2007) [pic] Source: WDI(world development indicators) online 2007, the World Bank Group Figure 2: GDP growth per capita in percentage in the Netherlands and Germany(1978- 2007) [pic] Source: WDI(world development indicators) online 2007, the World Bank Group Fi gure 1 and figure 2 show the annual GDP growth and GDP per capita growth in percentage in the Netherlands and Germany from 1978 to 2007. As in figure 1 and figure 2, from 1978 to 1982, the Netherlands and Germany both suffered an economics recession, with the annual GDP growth in percentage declining from 2. 33% in 1978 to -1. 21% in 1982 in the Netherlands and 3. 01% in 1978 to -0. 39% in 1982 in Germany. Then the Netherlands and Germany both experienced fluctuations in GDP growth. Especially in 1990, the Netherlands had a sharp rise from -1. 21% in 1990 to 4. 42% in 1989 and Germany experienced a sharp increase in 1990 from -0. 39% to 5. 26%, which is the highest growth rate for Germany in last 30 year. Afterwards, it shows a different trend between the Netherlands and Germany. The GDP growth declined to 1. 26% in 1993 and raised again till 4. 68% in 1999, while German GDP growth declined to 2. 01% in 1999 steadily. In the next 10 years, Dutch growth rate decreased till 0. 08% again as the lowest rate and then the rate slowly went up and became steady in recent years. Germany also showed the same pattern but the rate is lower than the Netherlands in general. Though the figures, we can see the Netherlands and Germany have a lot common in GDP growth rate and GDP per capita growth rate. Economy in these two countries are likely to be steady. Only in some year like 1982, 1990, 1993, 1999, 2002, it showed a sharp rise or decline. So, what happened in these remarkable years? What caused the difference in growth rate between the Netherlands and Germany? In the following sections we will discuss four key concepts related to economic growth in order to see through these problems. Section 2 2. 1 Economic freedom Economic theory indicates that economic freedom affects incentives, productive effort, and the effectiveness of resource use(de Haan,2000). We start with definition of the economic freedom:â€Å"Individuals have economic freedom when (a) property they acquire without the use of force, fraud, or theft is protected from physical invasions by others, and (b) they are free to use, exchange, or give their property to another as long as their actions do not violate the identical rights of others†(Gwartney et al. , 1996). Moreover, the key indicators of economic freedom are personal choice, voluntary exchange coordinated by markets, freedom to enter and compete in markets, and protection of persons and their property from aggression by others (Robert, 2006). In this paper, we use the indicators of the Fraser Institute. Gwartney et al. (1996) choose 17 measures and rate a high number of countries on each of these measures on a scale of 0–10, in which zero means that a country is completely unfree and 10 means it is completely free. The measures are in four broad areas: Money and inflation; Government operations and regulations; ‘Takings’’ and discriminatory taxation; and International exchange(de Haan,2000). 2. 2 Figures analysis Figure 3: level and ranking of economic freedom of the Netherlands(1970-2006) [pic]Source: freetheworld. om 2008, The Fraser Institute Figure 4: level and ranking of economic freedom of Germany(1970-2006) [pic] Source: freetheworld. com 2008, The Fraser Institute Though these two figures, we can see the Netherlands and Germany had the same pattern during last 30 years and they both got a high rate, which means they were both free to a large extent in economy. After 1980, the rate in the Netherlands was a little higher than the rate in Germany, but both are very stable. Compared with the rest of the world, the economy in the Netherlands and Germany are comparatively free. . 3 Results After we look though the GDP growth rate and economic freedom rate, we found there is a relationship between those two figures. More economic freedom fosters economic growth, but that the level of freedom is not related to growth. In other words, our findings suggest that more economic freedom will bring countries more quickly to their steady state level of economic growthif they are below that level. , but that the level of steady state growth is not affected by the level of economic freedom(de Haan and Sturm, 1994). And always the countries with more economic freedom can achieve higher levels of GDP per capital and grow faster (Lawson & Moor Chair, 2006). So we can say high economic freedom rate do contribute to high GDP growth rate, and steady economic freedom also has a positive effect on economic growth. Section 3(income distribution) 3. 1 income distribution Section 4 (Culture) 4. 1 Culture As Hofstede said the world is full of confrontations between people, groups, and nations who think, feel, and act differently. At the same time, these people, groups, and nations, are exposed to common problems that demand cooperation for their solution(2004, p2). Those confrontations and cooperation are called culture. Using the Hofstede's â€Å"Onion† model to depicts four cultural concepts: symbols represent the most superficial and values the deepest manifestations of culture, with heroes and rituals in between(2004, p6). Economic development will not stop at national borders. Globalization also require us to deal with culture differences and all the countries should work more closely than ever. 4. 2 Dimensions of Culture Five dimensions were frequently used to measure culture difference: power distance(PDI), the extent to which the less powerful members of institutions and organizations within a country expect and accept that power is distributed unequally(Hofstede, 2004, p46); Individualism(IDV), pertains to societies in which the ties between individuals are loose: everyone is expected to look after himself or herself and his or her immediate family(Hofstede, 2004, p76); Masculinity(MAS): A society is called masculine when emotional gender roles are clearly distinct(Hofstede, 2004, p120); Uncertainty Avoidance(UAI), the extent to which the members of a culture feel threatened by ambiguous or unknown situations(Hofstede, 2004, p167); Long-term Orientation(LTO), the fostering of virtues oriented toward future rewards, in particular, perseverance and thrift(Hofstede, 2004, p210). Following is the index scores of Germany and the Netherlands, compared with the World's average. Figure 5: Culture dimensio ns' index scores of Germany(1967-2001) [pic] Note: The Germany's Index Scores:PDI=35, IDV=67,MAS=66,UAI=65,LTO=31 Sources: from IBM data base(1967-2001),except LTO from original Chinese Value Survey database(2005) Figure 6: Culture dimensions' index scores of the Netherlands(1967-2001) [pic] Note: The Netherlands' Index Scores:PDI=38, IDV=80,MAS=14,UAI=53,LTO=44 Sources: from IBM data base(1967-2001),except LTO from original Chinese Value Survey database(2005) Figure 7: Culture dimensions' average index scores of the World(1967-2001) [pic] Note: The world' Average Index Scores:PDI=55, IDV=43,MAS=50,UAI=64,LTO=45 Sources: from IBM data base(1967-2001), except LTO from original Chinese Value Survey database(2005). According to the figures above, we can see PDI in these two countries are lower than average,which means people in these two countries are more equally treated than the rest of the world. For IDV index, the Netherlands and Germany are both societies with more individualistic attitudes, people there are more self-reliant and look after themselves or their close family members, also, individual pride and respect are more highly held values than world's average. When talked about uncertainty avoidance, Germany scored a little higher than the Netherlands, which shows it's a country will reduce the level of uncertainty by enhancing laws, policies and regulations to avoid unknown circumstances. In LTO, the Netherlands scores higher than Germany, which indicates its long-term oriented culture. But compared with the world's average,the Netherlands and Germany scored more or less in above four dimensions, except in Masculinity, the Netherlands got a lowest score at 14 among its dimensions which indicates a lower level of differentiation and discrimination between men and women. In Netherlands, women are treated more equally than Germany. Though every country has its own culture background,economic development will not stop at national borders. Globalization requires us to deal with culture differences and work more closely with other countries than ever. Nuclear warfare, global warming, poverty, AIDS, even recent economic recession are all good examples for global cooperation. Section5 (Entrepreneurship) Reference Kibritcioglu, A. and S. Dibooglu, ‘Long-run Economic Growth: An Interdisciplinary Approach,’ Office of Research Working Paper No. 01-0121, University of Illinois 2001 (http://www. business. uiuc. edu/Working_Papers/papers/01-0121. pdf ): Parkin, M. (2008). 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