Netherlands

							THE NETHERLANDS
Rank: 14 Regional Rank: 7 of 41

T

he economy of the Netherlands is 77.1 percent free, according to our 2007 assessment, which makes it the world’s 14th freest economy. Its overall score is 0.1 percentage point higher than last year, partially reflecting new methodological detail. The Netherlands is ranked 7th out of 41 countries in the European region, and its overall score is much higher than the regional average. The Netherlands enjoys high levels of investment freedom, trade freedom, financial freedom, property rights, business freedom, freedom from corruption, and monetary freedom. The average tariff rate is low, although non-tariff barriers include distortionary European Union subsidies, and business regulation is efficient. Virtually all commercial operations are simple and transparent. Inflation is low, and investment in the Netherlands is actively promoted. The country’s financial sector is highly developed, and it has been a European banking hub for centuries. The judiciary, independent of politics and free of corruption, has an exemplary ability to protect property rights. The Netherlands could do better in freedom from government, fiscal freedom, and labor freedom. Total government spending is high: almost half of total GDP. The government has been working to liberalize the labor market, but impediments to reform, such as extensive unemployment benefits, still exist. BACKGROUND: As a founding member of the European Union, the Netherlands stunned its fellow members by decisively rejecting the European Constitution in June 2005. Rotterdam remains the world’s largest port as measured by tonnage of goods, and there are few restrictions on foreign direct investment. The governing coalition has pursued its reform program by trimming welfare benefits and trying to liberalize the labor market while scrapping tax breaks for early retirees. A robust, modern agricultural sector exports high-quality foodstuffs. Other exports include metal manufactures and chemicals.

The economy is 77.1% free
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60

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Europe Average = 67.5 World Average = 60.6

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1995

2007

QUICK FACTS
Population: 16.3 million GDP (PPP): $517.6 billion 1.7% growth in 2004 1.3% 5-yr. comp. ann. growth $31,789 per capita Unemployment: 6.5% Inflation (CPI): 1.3% FDI (net inflow): –$6.1 million Official Development Assistance: Multilateral: None Bilateral: None External Debt: $1.7 trillion (2005) Exports: $388.9 billion Primarily machinery and equipment, chemicals, fuels, food Imports: $341.6 billion Primarily machinery and transport equipment, chemicals, fuels, food, clothing

How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index.

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THE NETHERLANDS’ TEN ECONOMIC FREEDOMS
Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 88.3 76.6 65.8 47.8 87 90 80 90 86 59.2
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mon Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. The government also regulates energy prices, pharmaceutical prices, and housing rents. Consequently, an additional 5 percent is deducted from the Netherlands’ monetary freedom score to account for these policies.

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50 100

INVESTMENT FREEDOM — 90%
The Netherlands actively promotes foreign investment, except in railways, the national airport, and public broadcasting. Foreign firms receive national treatment. There is no screening process, 100 percent foreign ownership is allowed in the areas where foreign investment is permitted, and foreign investors receive national treatment. There are no restrictions or barriers on current transfers, repatriation of profits, purchase of real estate, or access to foreign exchange. Capital transactions are not restricted but are subject to reporting requirements under the External Financial Relations Act.

100 = most free,

= world average

BUSINESS FREEDOM — 88.3%
Starting a business takes an average of 10 days, compared to the world average of 48 days. Such ease of entrepreneurship is good for job creation. Obtaining a business license is relatively simple, and closing a business is easy. Regulations affecting entrepreneurial activities are transparent and applied evenly. The overall freedom to start, operate, and close a business is protected by the national regulatory environment.

FINANCIAL FREEDOM — 80%
The Netherlands has been one of Europe’s financial and banking centers for centuries, and its financial system operates freely, with little government regulation. Foreign investors face no restrictions on accessing domestic finance. Banks established in the Netherlands may engage in a variety of financial services, even real estate. Three Dutch bank conglomerates (ABN Amro, Rabobank, and ING Bank) dominate the market and account for about 75 percent of total lending. There are few formal barriers to foreign banks, but foreign participation in Dutch retail banking is minimal. The government is minimally involved in the banking sector but does guarantee loans for small to medium-size enterprises that lack sufficient collateral for securing credit lines. EU banks receive privileged treatment. Capital markets are well developed, and the Dutch stock exchange forms part of the Euronext alliance.

TRADE FREEDOM — 76.6%
The Netherlands’ trade policy is the same as those of other members of the European Union. The common EU weighted average tariff rate was 1.7 percent in 2005. Various non-tariff barriers are reflected in EU policy, including agricultural and manufacturing subsidies, regulatory and licensing restrictions, and other market access restrictions. The government further restricts trade by implementing supplementary biotechnology and pharmaceuticals rules that extend beyond EU policy. Consequently, an additional 20 percent is deducted from the Netherlands’ trade freedom score.

FISCAL FREEDOM — 65.8%
The Netherlands has high income tax rates and moderate corporate tax rates. The top income tax rate is 52 percent, and the top corporate tax rate is 29.6 percent, which it is expected will be reduced to 29.1 percent in January 2007. Other taxes include a value-added tax (VAT), a tax on insurance contracts, and a real estate tax. In the most recent year, overall tax revenue as a percentage of GDP was 39.3 percent.

PROPERTY RIGHTS — 90%
Private property is secure. Contracts are very secure, and the judiciary is of high quality.

FREEDOM FROM CORRUPTION — 86%
Corruption is perceived as minimal. The Netherlands ranks 11th out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005.

FREEDOM FROM GOVERNMENT — 47.8%
Total government expenditures in the Netherlands, including consumption and transfer payments, are very high. In the most recent year, government spending equaled 46.6 percent of GDP, and the government received 4.6 percent of its total revenues from state-owned enterprises and government ownership of property.

LABOR FREEDOM — 59.2%
The labor market operates under restrictive employment regulations that could be improved to enhance employment and productivity growth. The non-salary cost of employing a worker is high, and dismissing a redundant employee is relatively costly. As modernization of the unemployment insurance program advances, changes will include reduction of the maximum duration of unemployment benefits from 60 months to 38 months.

MONETARY FREEDOM — 87%
The Netherlands is a member of the euro zone. Inflation in the Netherlands is low, averaging 1.6 percent between 2003 and 2005. Relatively stable prices explain most of the monetary freedom score. As a participant in the EU’s Com-

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2007 Index of Economic Freedom