Institutions, incentives and social policy in the 'Dutch model'

In this paper we discuss the Dutch social-economic model that has proved so successful in recent years. We pay special attention to the reform of the social security system and to the role of formal Institutions for Policy Coordination. The Dutch experience learns that in redesigning social security systems or facilitating macro-economic adjustment, a dialogue between unions, employers’ organizations and the government is a valuable asset. Countries that expand existing collective social security schemes or introduce new schemes should pay close attention to possible adverse labor market incentives associated with badly designed programs. Collective social insurance of the European kind might not be the best way to achieve income protection for countries with a high share of workers employed in the informal sector. We discuss individual accounts as a possible alternative and conclude that both social security principles have their pros and cons. Developing a system of social security that combines these two approaches could very well be the best way to pursue for developing countries seeking to expand income protection for their workforce.