Blog: Thursday, 4 June 2020

What can we learn from the enormous social, health and economic crisis we find ourselves in? Whatever the case, we now know that the current economic system in the Netherlands is no longer viable in this form, says Dr Koen Dittrich, researcher of innovation management at Rotterdam School of Management, Erasmus University (RSM) and applied research professor circular economy at Rotterdam University of Applied Sciences. According to Dr Dittrich, the question should not be whether fitness centres and restaurants may open again tomorrow to rescue the economy, resulting in the possible resurgence of the virus, but how we can design a less vulnerable socio-economic system in which welfare, climate and well-being go hand in hand. But what should our socio-economic system look like after the corona-crisis? And is the growth of aviation really so important for the Dutch economy, for example? Dr Dittrich shares his visions in this article.

An alternative value system: well-being above economic prosperity?

The lessons we have learned from the current crisis could mean the end of neoliberalism. Presidents Donald Trump (United States) and Jair Bolsonaro (Brazil) are excellent examples of this ideology. Their hands are itching to get the economy moving again as soon as possible. Yet in New York City, the consequences of Covid-19 are taking catastrophic forms, with huge capacity problems for the intensive care departments in hospitals. Reopening the economy and the country to international trade and free movement of people will thrust New York and the entire east coast of the US into a deep health crisis. Putting money above the health of the population is not only arrogant but will also endanger the economy in the longer term.

The problem of current neoliberalism is that we tend to measure economic health in dollars, euros or yen, not in terms of health of the population. Getting global trade moving again may bring about a brief recovery of the economy. But it will not resolve the problems that have been created by years of cutbacks on education and health care, or the poverty problem.

Iceland and New Zealand have recently taken a conscious decision to change course. Happiness of the population has higher priority for both countries than gross national product. The Icelandic prime minister Katrín Jakobsdóttir sees an alternative future that is based on well-being and inclusive growth, particularly in view of the climate changes such as the disappearance of glaciers. The prime minister of New Zealand, Jacinda Ardern, has also embarked on a new course. She wants to make the World Happiness Report the key indicator of a healthy economy and has announced a new government budget that is focused on improving the well-being local communities. An important part of that budget will include increasing services by NZ$ 200 million (€ 111 million) to help victims of domestic and sexual abuse, as well as housing programmes for the homeless people throughout the country. According to Dr Richard Layard from London School of Economics, this new budget is a real game-changer with New Zealand setting a new standard for progressive policy, because "no other major country has so explicitly adopted well-being as its objective."

Solidarity with employees

The Netherlands would do well to follow the example of Iceland and New Zealand. What the current crisis has made poignantly clear is that self-employed contractors and SME companies are particularly vulnerable, and therefore the Dutch economy is as well. In 2018, SMEs contributed 71 percent to employment and 62 percent to GDP.

Another thing to note is that the large companies do not show much solidarity with their employees. KLM requests government support to prevent redundancies, receives that support and then announces that the planned redundancies will take place anyway. Furthermore, it is wrongly suggested that Schiphol Airport and KLM are crucial for the survival of the Dutch economy. Research by CE Delft consultants in 2019 calculated that international connectivity thanks to Dutch aviation has no causal relationship with economic growth. The conclusion drawn by CE Delft is therefore that "there are no reasons to assume that the Dutch economy would suffer from moderating the growth or a limited reduction in aviation," but "that the environment would benefit."  

Instead of KLM and Schiphol thinking about a different revenue model, with fewer and more expensive flights that incorporate the climate costs and a flight tax, KLM passes on the business risk to the bottom layer of the workforce, to mitigate the financial consequences for its the shareholders.

The same applies to media company Talpa. Owner and multibillionaire John de Mol also shows himself in a very poor light. Rather than drawing up an emergency plan for his employees, many of whom are freelancers and self-employed contractors, he also announces redundancies. Yet, he could have used his equity of € 2.7 billion to set up a fund to provide a social safety net for his loyal employees, who largely contribute to Talpa's success. And has also asked for emergency support to continue paying employees, despite having recently received billions of euros in fiscal benefits and mainly using them to buy back its own shares on a large scale instead of investing them in a sustainable business model.

Conditional support for large corporates

If the government wants to support large corporations to prevent our economy moving into a major recession, it should at least set stringent requirements for that support, for example improved sustainability of products, services and production processes. Once the companies are healthy and profitable again, the government can benefit in the form of tax income. In compensation for government support, taxes on operating profit could then rise. If we apply that logic to KLM and Schiphol, cheap holiday flights should be relegated to the past, because we would then pay excise-duty on kerosene and a supplement for the impact on climate and the environment, like CO2, NOx, fine particles and noise nuisance.

The extra sum that we pay can then be invested in more sustainable alternative transport, both within aviation but also outside, such as in fast international rail services. The supplement on the plane tickets also makes those international rail connections competitive in price so that these lines would become a feasible alternative for short flights. The main profit lies in the fact that we thus take a bigger step as a country to achieve our climate targets.

Companies that had already sorted out their business model long before the crisis include Desso and Interface. Their manufacturing processes have been climate-neutral for years, and in a way that still enables them to make a profit. And DSM, then led by former CEO and RSM alumnus Feike Sijbesma, has also taken huge steps to make their business model sustainable, very emphatically embracing the SDGs in formulating the general business strategy. For their plastic products, at least 25 percent is produced from bio-based or recycled materials. Together with Auping and Afpro Filtertechniek, DSM has also seen the corona crisis as an opportunity to produce FFP2 face masks on a large scale and thus help resolve the shortage of personal protective equipment in the health care sector.

Sustainable, local food production

The current crisis also raises questions about the Netherlands as one of the largest export countries of agricultural products. Although the precise origin of this coronavirus has not yet been identified, these types of viruses originate in animals. These zoonotic viruses have emerged on a regular basis in various parts of the world in recent years. We have had a series of such viruses, such as Ebola, Lassa fever, MERS, SARS, Q fever, but the MRSA and Influenza A viruses also originate in animals.

When Bird Flu or Q Fever is identified, livestock farms and petting farms are required to keep their livestock indoors. Now that we as humans are forced to stay at home in a similar situation, this certainly forces us to rethink how we organise our food production system. We are now discovering how fast these viruses can spread. I feel that this calls for a much more sustainable, local food production system. In the current situation, we import soya from Brazil as chicken feed for broiler hens and then export frozen chicken to China. Instead, we could feed our chickens with residual produce like waste from the local vegetable processing industry and grain products from the bakery industry that are past their expiry date, or even locally grown legumes like peas or beans. Companies like Kipster and Johan Leenders are already doing this. The chains could also be radically shortened. What now happens at an arable farm in Zeewolde is that customers buy local products from the farm at a drive-through and pay with a Tikkie, without the mediation of a retailer. Initiatives like Rechtstreex are based on a similar principle. Local products, sold in the region (local-for-local).

So short chains, sometimes without a physical shop, like online supermarket Picnic, and circular agriculture, local-for-local, as a basis for our new food system. And obviously attention for sustainable production and animal welfare. No mega barns, many more organic and natural farmers, attention for biodiversity, focusing on the health and well-being of people and animals.

The price of a hen's egg at Kipster or of vegetables from Rechtstreex is not necessarily much higher than similar products in the supermarket. The main difference is that these prices are a much better reflection of the actual cost price of the product, thereby including all the indirect costs. We call this true pricing. True pricing means that the economic, environmental and social impact for a product is measured and included in the price of a product. We may pay slightly more for a Kipster egg than for a standard free-range egg, but the climate impact of that egg is much lower. The initiative for this innovation may have come from Kipster itself, but the success of the formula is mainly due to its purchase contract with Lidl. This contract stipulates fair prices and a guarantee for purchases for the first five years. With the new branches of the company, new contracts were immediately entered into with caterer Albron and Efteling theme park. The role of retail and the catering industry as launching customer - the first purchaser and sponsor for market introduction - is therefore essential for the success of such a new, sustainable business model.

More sustainable manufacturing industry

A different economic system is equally desirable for other products too. Again, our products are manufactured all over the world, and we also export to all corners of the world. That consideration is mainly based on wage costs and availability of cheap materials. But the downside is that many transport movements are necessary to fulfil the apparent need of the consumer desiring to buy everything as cheaply as possible.

Here too, there is the problem that the actual costs are not included in the cost price. The cost price calculation is based on the input (labour, capital, materials) and not necessarily on the activities required to manufacture a product (activity-based costing). In contrast to the traditional cost price systems, with activity-based costing, a connection is made between the cost drivers and the indirect costs. So, for clothing that is manufactured elsewhere, besides the raw materials, labour and transport, we also pay for the social costs (preventing child labour), compensation for dangerous working conditions (chemical cleaning, bleeching and dying of textiles) and the environmental and climate impact of the chosen materials, colourings (water use, chemicals) and transport (CO2, NOx, fine particles). When we include these costs, we also arrive at the real prices of a garment. And then it would probably be much more attractive to start producing clothing nearer home, so that we can improve and above all safeguard working conditions, sustainability and climate impact.

An economic system resulting from this would be much more 'local-for-local', with as many products as possible from the manufacturing industry being produced in a closed chain and whereby the chains will be shorter. This leads to fewer transport movements, and thus less climate impact. Another solution can be found in the location policy of municipalities. Municipalities could impose much more stringent sustainability requirements when issuing permits. Business parks could then boost the sustainability strategies of the companies wishing to relocate there. Without a well-thought-out, sustainable strategy, a company may not relocate to that municipality. If several municipalities in a region join forces with the environmental services for this, companies will be forced to make their strategy more sustainable at a faster pace. This has already happened with a pilot for Donkersloot business park, whereby the municipality of Ridderkerk joined up with the environmental service DCMR and Tonnaer consultants to draft new requirements for permits.

To conclude

There is something else that we have learned from the corona crisis. Social distancing and working from home offer nature an opportunity to recover from our decade-long overexploitation. In my opinion, the examples of big business at KLM, Talpa, and our global trade in products and services reveals the shortcomings of our current economic system. Other values apart from purely financial values, such as good education, nature, health, social structure, family, have proved much more important for the economy than euros in the bank. Why, then, are our teachers and nursing staff consistently undervalued? And why are we unwilling to pay a few cents more for truly sustainable products? What we need are fair prices for products and transparency in production chains about the origin of raw materials and the production process. The launching customer plays a very important role too. If supermarkets, like Lidl, or government bodies take the lead in sustainable purchasing and procurement, the rest of the value chain can be part of the sustainability programme without immediately abandoning profit and economic growth.

If businesses, government bodies and consumers are prepared to pay fairer prices and draw up more stringent, sustainable requirements for the products they buy, a more resilient socio-economic-ecological system will emerge for future generations, in which the well-being of people and animals is key, resulting in a sustainable planet-proof economic growth.

Dr. Koen Dittrich

Assistant Professor

Rotterdam School of Management (RSM)

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