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Frank van Oort Image credit: EUR

Stock markets have crashed, many countries are on lockdown, and large chunks of the economy have come to a standstill. This week, the Dutch Prime Minister, Mark Rutte, addressed the nation in a live broadcast, something that hadn’t happened since the 1973 oil crisis. As an economist, what do you make of the current situation?

“Nothing remotely like this has happened in my lifetime. I was born in 1970. This could be the start to a shock to the system. We are living in an extremely globalised world. There are many upsides to this, particularly in the availability and low prices of many products. But it also means that a crisis like this immediately turns into a global crisis, and not just because people are travelling more and therefore are more likely to infect each other. From an economic point of view, what is interesting here is seeing the downside of the long and extremely interwoven value chains that have been created in the last few decades. Due to low labour and transportation costs, it has become much cheaper since the 1980s to have products, or components thereof, manufactured in, say, China or the Philippines, only to have them assembled and sold in another country. For their part, Western nations have come to specialise in services and research & development.”

How is the Dutch economy affected by the fact that, now that the current measures are in place, public life has largely shut down until the 6th of April at the earliest?

“The closing of cafés and restaurants, schools and child care centres has resulted in both production and consumption being decreased significantly, both directly and indirectly. It’s a huge blow to the tourist industry and the arts and culture sector, where people are currently at home wondering what to do in the next few months. The Dutch economy is largely service-based. And yes, some of these services may be able to be provided from people’s own homes, but that is considerably tougher if you have a child sitting in your lap, or worse, more than one. Moreover, many of these services depend on other sectors, such as the manufacturing industry. If fewer cars are sold or manufactured, fewer drivers take out insurance. And if fewer chemicals are produced in the Port of Rotterdam, fewer financial services will be required in the city centre.”

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The OECD has recently significantly cut the global economy’s growth forecast. The American investment bank Goldman Sachs has estimated that the Chinese economy has shrunk by 9 per cent in the first quarter of 2020. By now people are calling it an ‘inevitable recession’. Do you think they are right?

“A recession is negative economic growth for a period of two or multiple consecutive quarters. It doesn’t take much to create a situation like that, particularly since we are not only referring to the Netherlands. This situation is different from, say, the 2008 global financial crisis, which largely revolved around structural problems in the housing market, in that we are dealing with a virus. Once that virus has been contained, the economy should theoretically make a fairly quick recovery. But obviously, a fair bit of money will have been lost by that time.”

Do you think the current system is resilient enough?

“For the last few days I’ve been obsessively ruminating on the idea that we have created a very precarious situation for ourselves. Such complex international production chains work when everything goes to plan, but as soon as something goes wrong, the whole thing will collapse like a house of cards. I’m shocked at how vulnerable we are.”

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Image credit: Bas van der Schot

Will the fact that the Dutch economy is, as you were saying, service-based, affect the rate at which it will recover?

“That is a hypothesis that is worth researching. I’m tempted to say ‘yes’. We are flexible, and – this is interesting with regard to this particular crisis – in many cases we are able to do our work from home. But when it comes to providing personal services (health care, education, retail, security), which is a sector half of our population works in, people have no choice but to get up close and personal with a lot of other people. Service-based economies are brought to their knees quickly, but can also be started up again quickly. Moreover, our fixed costs are low, compared to countries that still have a large manufacturing industry, such as Germany.

These times are horrible, and I obviously hope that most people survive. But from an economist’s point of view, it’s interesting to watch the impact on countries, regions, cities and sectors of the economy.”

What do you expect the situation to be like in Rotterdam?

“At the beginning of March, just before the coronavirus hit the Netherlands in earnest, the Municipality of Rotterdam released its annual exploration of the economy, to which I and a few of my colleagues contributed. This analysis showed that the city has been growing considerably in terms of business services in the last few years. That is a very good thing. Moreover, there’s something intangible that is making this city very attractive. Rotterdam has been doing better in recent years than one would expect, given the available sectors. That’s quite an achievement, considering that, due to the energy transition, the city is gradually going to have to say goodbye to some of the types of businesses it has traditionally attracted. There’s something here – the culture, the vibe, the cafés and restaurants – that attracts new people and companies. I’m currently conducting a study on the impact of the arts and culture sector. Most people will now think: we have some cinemas, the theatre and the Rotterdam International Film Festival, and that’s it, basically. But a sound arts and culture sector creates jobs throughout the region. This is – and will continue to be – a sector that is valuable to the city.”

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Image credit: Bas van der Schot

At the behest of the United Kingdom, you conducted a study last year on the economic impact of a hard Brexit. Your conclusion was that low-income households would have to bear the brunt. Who do you think will be most impacted by the coronavirus outbreak?

“When we conducted that study, we found, ironically enough, that those regions that voted in favour of Brexit – generally less affluent regions that used to have a lot of manufacturing industry – would be hit the hardest. To some extent, it will be the same groups of vulnerable people who will bear the economic brunt of the coronavirus pandemic. The main difference is that people on regular contracts will continue to receive their salaries. We will have to wait and see what kinds of reserves people have at their disposal.”

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The Lebanese-American statistician Nassim Nicholas Taleb calls outlier events like these – which have a tremendous impact, but are impossible to predict – ‘black swans’. How do we prepare our system for such events?

“I think that we should seriously consider the possibility that these types of events will become more common. I’m sure everyone will be very happy once this is over, and everyone will want to get back to work as soon as possible. But when the next black swan shows up three years from now, we should be prepared to tackle it head-on. Maybe we should let go of the idea that a 3 or 4 per cent growth rate the standard is we aspire to. Maybe we should accept that very slight growth, or no growth at all, is a more realistic scenario. My colleague, port economist Bart Kuipers, recently wrote that companies have been wanting to ditch those vulnerable and long production chains for a while now. The coronavirus outbreak is accelerating that process.

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“A system in which we manufacture things closer to home is more robust. It would be wonderful if we could aspire to an economy that prioritises reliability rather than speed or efficiency. I’ve conducted a lot of research on logistics. It’s great that we can take the Intercity Direct train to Schiphol ten times an hour, but it’s pretty useless when half of these services are delayed or cancelled. If you’re going to do that, we’re better off with two services per hour that are on time and will not be cancelled.

“It should be noted that reliability comes at a price. A car fully manufactured in Germany or France is going to be much more expensive than a car consisting of parts that come from all over the place. And of course it is by no means certain that we could manufacture all the parts ourselves, even if we wanted to. The USA is trying to give off the impression that it’s doing just that. However, in truth, most of the large products sold there consist for 60 per cent of parts manufactured abroad. The Netherlands simply doesn’t have enough room [for a manufacturing industry]. And we have lost all the skills involved in manufacturing things, as well. That’s a ground for concern.”

Your Amsterdam-based colleague Ewald Engelen called on the government last week to allow KLM, which is struggling right now, to go into receivership. To what extent can this crisis be used to expedite the energy transition?

“This is going to be a dull answer, but the government should support both innovative parties and established companies, even if they are fossil-fuel-driven. A company like KLM has many employees, and an economy needs a proper airline. But yes, this cabinet does have a tendency to mostly support the established order, and we shouldn’t lose sight of all the innovations and transformations we are going to need in the future. But it’s a bad idea to throw away one’s old shoes before getting new shoes to replace them.”

The professions that are now deemed essential are professions that have not been treated kindly in recent years. Once this is all over, would you advocate a better collective agreement or higher wages for cleaners, teachers, supermarket shelf stackers and healthcare providers?

“There is a new movement, the foundational economy, in which people are asking for a greater appreciation of these types of jobs. It’s sad that many people didn’t realise how vital these jobs are until now. We should be investing in them. Particularly since they also support other sectors that might appear to create more added value on the face of it. In recent years, everyone has been talking up information technology and the creative industries. But we need to have a properly functioning base in order to be able to build other things.”

Frank van Oort is a Full Professor of Urban and Regional Economics at the Erasmus School of Economics.